Considering Our Options – $TXN

by Dan July 19, 2013 1:47 pm • Commentary

On Wednesday, prior to INTC’s Q2 report, I rolled up my bearish TXN position and moved it closer to August. With the July portion of the calendar expiring today and earnings on Monday we looked at different options to spread the Aug 38’s.  

With the stock’s weakness over the past 2 days, the roll has worked as we wanted it. But the stock still sits above its next support level of 36, which seems quite realistic considering the overall weakness we’ve seen in the semiconductor space the past few days. We looked at perhaps spreading the 38’s by selling the 36’s in August. But we kind of like the setup into Monday by just being long the 38 puts with the chance that the stock could be down again before it reports after the bell.

So we’re going to let the July portion expire, stay long the Aug 38 puts over the weekend, and reassess on Monday before the report.

 

 

 

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Previous Post July 17th, 2013:  Trade Update & Adjustment $TXN: This Aggression Will Not Stand…Man 

Last month, after TXN held their mid quarter update and lowered the mid point of their guidance range, I wanted to create a trade structure that would set up to own puts into the company’s official Q2 report and what might capture, what I think, is a fairly decent shot for a Q3 guide down.  Since initiating a put calendar (below) the SPX is up almost 6%, and TXN is up about 5% to new 6 year highs.

Lets first take a look at my existing position from June 19th:

Trade: TXN ($36.17) Bought the July / Oct 34 Put Spread for .90

-Sold 1 July 34 Put at .27

-Bought 1 Oct 34 Put for 1.17

The July puts will expire worthless on Friday’s close, and the Oct 34 puts are now worth about .52 with the stock at $38.  At this point If I were to create a structure where I wanted to be short, I would be looking to use $34 as new support.  So I don’t think the Oct 34 puts are a very good “own”.  I am now going to roll this view with an eye towards increasing my odds of success if TXN does in fact gives guidance below consensus in their July 22nd report.

So I am going to roll up (higher strike), and (earlier) into Aug expiration:

Action: TXN ($38) Sell to close Oct 34 Put at .51 for a .66 loss, and going to let the July 34 put expire worthless for a .27 gain, so on the position so far I will have a .39 loss.
2nd Action: TXN ($38) Buy to open Aug 38 Put for 1.15
New Position: TXN Long Aug 38 / July 34 Put Spread

On Monday, once my short July 34 put has disappeared I will look to spread the Aug 38 Puts that I own into a put spread prior to TXN’s Q2 earnings.

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Original Post June 19th, 2013:  New Trade: Messin’ with $TXN

Last Monday TXN held their Q2 mid quarter update (release here) where the company tightened their previous guidance range to:

  • Revenue: $2.99 — 3.11 billion compared with the prior range of $2.93 — 3.17 billion
  • EPS: $0.39 — 0.43 compared with the prior range of $0.37 — 0.45.

While they tightened the range, they left the mid point essentially the same for both sales and earnings (inline with consensus), yet it was their commentary on their conference call that caused the stock to sell off 5% in the 2 days following the call.  Not unexpected, the company spoke to weakening demand in computing and wireless, but decent demand from the industrial sector and automotive.  The company even mentioned that their communication infrastructure vertical was seeing some growth quarter over quarter and that they were starting to see a mild pick up in China.  All in all didn’t seem like a disaster, but investors used the PC/wireless weakness to sell.  [private]

Since last week’s dive the stock has since recovered most of the losses and could be at a vulnerable spot as investors will quickly focus on what should be a late July Q2 report where Q3 guidance will be the focus.  My sense is that Q2 will come in line to the range they just gave, very likely close to the mid point, but we could see a reset to the second half expectations.

TXN is up nearly 18% ytd, despite Wall Street analyst expecting earnings to decline 6% year over year (marking the 3rd straight annual decline), while sales are expected to decline 5% (again the 3rd consecutive decline).  Much like INTC, the company’s 3% dividend yield, $5 billion share repurchase and strong balance sheet has helped buoy the shares this year.  But on a relative valuation basis, TXN trading at 17x next years earnings, vs INTC trading at 12.5x 2014 earnings, and QCOM at 13x, I know what I’d rather own, the latter (read current positioning on QCOM here, long July/Aug 65 Call Spread).

Given that bias to look to have long exposure in QCOM into their Q2 report in late July, and my inclination to set up short TXN into their late July Q2 report, I want to essentially do the opposite trade for TXN that I have on in QCOM.

Trade: TXN ($36.17) Bought the July / Oct 34 Put Spread for .90

-Sold 1 July 34 Put at .27

-Bought 1 Oct 34 Put for 1.17

Break-Evens:

The ideal spot for this stock at July expiration is 34, at which point the short July 34 put will be at zero and the Oct 34 put will still be bid. Before then the structure is slightly bearish with 34 still acting as the ideal spot, but even without much movement the structure will benefit from July decaying at a faster rate and October IV hopefully staying bid due to the fact that it catches earnings  The worst case scenario in the near-term is that the stock immediately rallies far above the 34 strike.

Payout Diagram:

[caption id="attachment_27263" align="aligncenter" width="560"]Screen Shot 2013-06-19 at 8.51.25 AM from TradeMonster[/caption]

Trade Rationale:  We chose the 34 strike for the calendar because it is near the midpoint of the stock’s price action in 2013 (red line at 34):

[caption id="attachment_27259" align="alignnone" width="640"]TXN 1 year daily chart, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg TXN 1 year daily chart, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

The 34 level is also almost halfway between the 50 day ma around 36 and the 200 day ma around 32.50.  It’s an area where a lot of trading has occurred this year, and a level that might act as a magnet on any weakness in TXN.