3nd Update: NTAP Earnings Preview and Short Term Low Premium Bearish Structure

by Dan August 18, 2011 8:45 am • Commentary

3rd Update 10;27am:  I am out of this position fully at .25 for break even excluding commissions.  The likilihood of this thing coming back to above 35.25 is not great by tomorrow’s close.  Use stops, the bid ask is wide……

2nd Update 9:45am: With the stock now down 17.5% at 34.25 I just sold 3/4 of my position at at .25.  Worst possible scenario to get direction right and structure wrong….I am getting out for break-even and kicking myself for the blown opportunity, I can’t say that this was a high conviction idea which is why I want to commit a small amount of premium for a big move…… I guess this can be best summed up by The Stranger from the movie The Big Lebowski, “Sometimes you eat the bar, sometimes, well the bar, he eats you”.

Update: Well I nailed the direction and the reason for the sell-off, the company did in fact lower guidance for their fiscal Q2 as  result of a slowdown in orders in July and August.  Frankly, I am not that surprised by this, and I guess given DELL’s guidance the other day, I am curious how CSCO CEO John Chambers didn’t relay similar caution for the coming months due to the lack of visibility that is surely abound…..

Ok, Back to the hard part, trade management…..so the ideal situation for the structure detailed below is that the stock closes on tomorrow’s expiration right where it went out last night, before the S&P futures were down over 2%, at about $37.   With the stock trading around $36 with 2 trading days till expiration it may make sense to take what profits you can as the worst case scenario would be for the stock to break below 35 in a sloppy market and get the direction 100% right for all the right reasons and lose money….I will likely look to sell half and take my cost off the table and then let the other half ride to Friday’s close.   Check back after the open and I will give another update.

Original Post Aug 17,  2011: NTAP Earnings Preview and Short Term Low Premium Bearish Structure

NTAP $41.38

-Company reports their fiscal Q1 tonight after the close.

-options market is currently implying about a 9.5% move (this has moved up in the last few days) vs the average move of about 6.15% over the last 8 qtrs.  

-Street is relatively positive on the name with 28 Buys, 14 Holds and no Sells.

-Short interest looks fairish relative to recent past, a little below 5%.

-Stock is down 19% ytd, up 7% since the lows last week and down about 31% from the 52 week high.

WHAT WE KNOW: on June 30th the company held their annual analyst meeting in NYC and not only endorsed guidance for the July qtr, but also raised their guidance for their fiscal 2012.  Stock at the time was lagging most tech names and the overt bullishness by management help rally the stock almost 10% in 2 days.]

Bulls point to tailwinds for increasing demand for high end storage networking solutions as a result of the trend towards virtualization which are aiding market share gains at NTAP.

Company has stated that they will continue to make tuck in acquisitions but also evaluate larger ones……they certainly have the balance sheet to do it with a little more than $4billion in net cash on a $15bil market cap.

Valuation is at the low end of its historical range trading at about 16.5x next years expected earnings, which are projected to grow about 15% yoy.

MY VIEW: even with the stock down 24% since the post analyst day rally, there is, believe it or not, a lot of optimism in the stock.  I guess what I mean is there are some that don’t believe the guidance, and if they were to guide Q2 down but leave fiscal 2012 (which they just raised) it would cause many to flee the stock short term.

Technically, $40 is a huge support level dating back to mid 2010 and if it goes through again on any meaningful news it is likely to go much lower.

[caption id="attachment_4157" align="aligncenter" width="300" caption="2 YR NTAP chart from Bloomberg"][/caption]


TRADE IDEA: I want to play for an expected inline qtr and a guide down for Q2 which will call into question the recently raised fiscal 2012 guidance.  I wouldn’t be naked short the stock because a beat of that Q1 guidance coupled with the company maintaining their q2 guidance would most certainly cause a short squeeze……Also while the company may be in acquisition mode they could most definitely be acquired as they have in the past been rumored as a target by HPQ, CSCO or IBM.

My thought here is that given DELL’s murky outlook, NTAP’s exposure to the public sector and the likelihood that businesses may be spending less given the fear of a double dip recession, that they will see very little incentive to give overly optimistic guidance for the current period.

TRADE: NTAP $$41.38 Buy the Aug 39 / 37/ 35 Put Butter Fly for .25

-Buy 1 Aug 39 Put for 1.43

-Sell 2 Aug 37 Puts for a total of 1.60 (.80 each)

-Buy 1 Aug 35 Put for .42

Break-Even on Aug Expiration (Friday):

Profit: btwn 38.75 and 37 make up to 1.75, at 37 make full 1.75, btwn 37 and 35.25 make up to 1.75 but payout trails off.

Loses: above 39 lose .25, btwn 39 and 38.75 lose up to .25 and btwn 35.25 and 35 lose up to .25

TRADE RATIONALE:  I want to press the short but define my risk without a large premium outlay.  You will not have a lot of time to have this one play out, so the stock will either gap on earnings lower or you will likely lose all the premium that you paid….so as always, risk what you are willing to lose in this sort of trade and always use limits when executing a multi leg trade.  I wouldn’t pay more than .25 to .30 for this depending upon your conviction….to break-even you will need the stock down 6%, so this is a bit of a long shot, playing for a big disappointment.