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Alcoa (NYSE: AA) Oct 22 close: $31.66

RECOMMENDATION: SELL
Strategy: Buy AA=MZ January 2005 Puts, Strike @32.50

Price at the market close Oct 22 (AA=MZ @ $2.10)

Trader Wizard's expectation for this trade:
The AA+MZ (Jan-05 32.5) puts are costing me ~$1.26 time premium. I anticipate AA to re-test its $28-29 base (say -10%) within 60 days, based on a fair value price of 18 times 2004 earnings of $1.56e ($28.05). That would be a test of the May-10-04 low. If so, the puts @ $2.10 would double, for a 100% gain. This is a trade that could have easily been put on @ $1.20 a couple days ago when I knew 99.5% of the information used to make this trade. But, this is a Weekly Ezine.

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Just hours after I published my SELL recommendation on Alcoa, on October 24, the venerable firm of Merrill Lynch Pierce Fenner & Smith (etc) put out their BUY on AA, so I wrote the following note for TW:

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The market would never exist unless there were two sides to every price. And, I learned a long time ago that the market is not about me. So, in order to get ahead, I knew I had to understand the other side. I had to understand why the sellers were selling, if I was buying, or why they were buying if I was selling.

It eats away at me if I can't come up with an answer. And when I start to feel confident, cocky, whatever, I lose my focus. That's when losses start to mount up.

Tonight, after publishing my Weekly Ezine sell recommendation on Alcoa (NYSE: AA), I learned in the attached article [note: since removed & I wonder why] that Merrill Lynch is going to buy everything I sell. It seems they are in love with Alcoa. They've got deep pockets too, so I guess my pick this week is in deep trouble. :-)

Now, I'll have to find out why. Otherwise, I just can't see myself knocking off 100+% gains for you week after week. I'll be thinking too much that, in Merrill Lynch, I finally met my match.

Doubts will creep in. I'll have to go to a shrink.

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No, fans, I wasn't wrong. There was no need to doubt myself " as if any of you really think I did.

Merrill Lynch proved yet again they were not my match. Sure their BUY on AA drove the stock up to $35 in the following four weeks. But, that just made it a bigger short, for the time they unloaded their positions in Alcoa.

So, if you've clicked on the chart of the 32.50 Jan put, you already saw that the option I bought is up 51.4 percent, from $2.10 to $3.18, and Merrill Lynch has diddled their clients, probably, a couple hundred million.

Maybe ML even redefined the word "venerable", changing its basis from self-sacrifice to sacrificing the client?

"Merrill Lynch: Home for financial planning and advice, mutual funds and investment banking, ..." That's what their website says. At least they don't brag about how they make small fortunes for their clients -- which is -- you guessed it -- by starting with big fortunes.

Ka-ching!

BCara@BillCara.com

p.s., The TW articles are slow to search, but I will address that issue after I bring up the new blog to speed.