Investment Review №343. The return of the bulls

Trade Thesis

A bet on the delayed conversion of higher aluminum prices into Alcoa's financial results. The Q1 report did not fully capture the pricing upside — but the Hormuz blockade continues and the physical aluminum market remains tight. If the supply deficit persists, the stock gets a second chance at re-rating as the price effect works its way through in coming quarters.

Key Arguments

• The Hormuz blockade is ongoing — the physical aluminum market remains tight. Logistics disruptions have not been resolved, and as long as supply deficit risk persists, the pricing support for producers outside the region stays in place.
• Q1 earnings disappointed on price conversion, not on volumes or cost structure. That means the operating base is intact — and if aluminum prices stay elevated through Q2, the EBITDA effect could materialize with a lag rather than disappear.
• The market has already adjusted expectations after the weak Q1 conversion — some of the disappointment is now in the price. If Hormuz does not de-escalate quickly and aluminum prices remain elevated, the market may begin pricing in a positive Q2 effect before it shows up in results.

Risk Managment

If AA closes above $70 but below $75.30 at expiration on 06/18/2026, the investor will realize a partial loss depending on the final stock price. If the stock closes below $70, the maximum loss equals the premium paid — $530. If the stock closes above the breakeven of $75.30, the position becomes profitable. The base case is to hold until the target premium of $8.95 is reached. Key risks: de-escalation around Hormuz quickly removing the aluminum price premium; structural factors continuing to limit price conversion (logistics, hedging, energy costs); and time decay eroding the position if the stock fails to move before expiration.

Trade Parameters