Reflex reaction to news from China yesterday reeling semiconductor sector. But this fall is overdone, leaving plenty of opportunities. Among the biggest bullish opportunities now lies applied materials, Inc. (NASDAQ:AMAT).
Let’s understand the history of China first. With the threat of a trade war brewing with the US, Chinese officials outlined a plan to stimulate domestic production of semiconductors. In fact, China has done chip development is a key component to its Made in China 2025 initiative.
The problem is that Chinese semiconductor firms are far behind their competitors in USA, Japan and Europe. In other words, competition from Chinese manufacturers of the chips will not come in the near future, making yesterday’s sale, as premature.
In the result of overzealous treatment in the semiconductor market shares Thursday, AMAT shares fell nearly 6.5%. Shares are now down more than 18% of 12 March peak near $61 placement of shares of AMAT close to current levels.
Click to EnlargeThe stock is also trading near its 200-day moving average to breach their 50-day on Wednesday session. As a result, shares of AMAT is now approaching the key psychological and technical support at a price of about 50$. With the industry lagging behind in the ratio P/E just 19.27, shares of AMAT’s sure to quickly rebound from current levels.
Good news for the Bulls of the materials used is that the catalyst is just over the horizon. The company will report first-quarter earnings in mid-may. Date not set, but according to experts, the report around the 16 of may, about four weeks.
Analysts expect applied materials earnings soar 44% year-over-year to $1.14 per share. The company is expected to increase by 25.5 percent to 4.45 billion. This is some solid growth, given its solid market position, it will not be long before Chinese companies threaten market share. Look up the manual to be positive and AMAT shares to rise as a result.
In addition to the negative Chinese titles, sentiment towards the stock AMAT is very optimistic. For instance, Thomson/first call reports that 20 out of 21 analysts rate the shares “buy” or better rating with one lone “hold” outstanding. Moreover, it is currently trading significantly below consensus 12-month target price of $70.24, leaving enough space to run, before the evaluation becomes a problem.
AMAT traders are also very optimistic. At last check, in may of the put/call ratio of open interest amounted to 0.57, with calls almost twice puts among the options are potentially most affected by earnings. Peak call OI for the series is 5,100 contracts overhead costs the $55 strike.
Overall, implieds may prices for a potential post-earnings move of about 7.75% in stock AMAT. This imposes an upper limit at around $55.15 and the lower boundary around $47.20.
2 transactions in shares of AMAT
Call distribution: the prohibition of geopolitical factors, AMAT shares at the modern entry point for long positions heading into earnings. Shares are overbought and is trading at a significant discount to its peers and market expectations. As a result of the rally can be much more than pricing options.
Traders are looking to profit from this situation, you may want to consider that perhaps the $55/57.50$bull call spread. At last check, this spread was offered at 57 cents, or $57 per pair of contracts. The breakeven point is at $55.57, while a maximum profit of $1.93 or 193 $for two contracts — a potential 230% profit is possible in the presence AMAT closes at or above $57.50 when the options expire.
Put sell: the problem with betting on bullish earnings reactions right now is that the materials used are not formally set a date. If it happens to be after the may options, it will negatively affect the above trade ideas. For those looking for a more cautious approach, and in may $45 put sell is a viable alternative.
Finally to check is to put the rate at 55 cents, or $55 per contract. If the stock price of AMAT is trading above $45 through expiration, the trader entering the post will retain the premium received. However, if AMAT stock is trading below $45 ahead of expiration, traders could be assigned 100 shares at a price of $45 per share for each sold contract.
At the time of this writing, Joseph Hargett does not occupy a position in any of the above securities.