Last week I made a contrarian bullish bet that DDD was gearing up for a pop after a more than 40% decline from the January highs. The week started out with some fairly impressive relative performance to some of its high valuation tech peers, and after a mid week lull the stock is now approaching the key $60 technical level that I identified last week (below).
With the stock up a little more than 5% in a week, I am going to use that strength to offset some of the premium that I have at risk, but in doing so give up some potential upside.
Action: Sell to open DDD ($59.90) April 65 call at 1.05
New Position: Long DDD ($59.90) April 60/65 Call Spread for .65
New Break-Even on April Expiration:
Profits: btwn 60.65 and 65 make up to 4.35, max gain of 4.35 above 65
Losses: btwn 60 and 60.65 lose up to .65, max risk is .65 below 60
Rationale: The Apr19th 60 call on its own is going to start decaying quite quickly since expiry is now only 3 weeks away. As a result, selling the upside call reduces the overall decay on the position going forward, and reduces the premium at risk to only 40% of the original outlay.
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Original Post March 21st, 2014: New Trade – $DDD: Refill Cartridge
Yesterday we detailed the horrendous price action in 3D stocks on the heels of XONE’s negative earnings pre-announcement (below). 3D stocks continue their slide today, actually sporting equal to if not greater losses than yesterday.
In our post yesterday we detailed $60 as a very important technical support level, which it has blasted through today, with $50 on the downside with obvious technical support. With the stock almost midway between that range, and down almost 40% on year the negative sentiment could be reaching a fever pitch. Oh, did I mention that short interest is at 25% of the float. To be clear I am not a fan of the stocks, while I do believe “3D printing is a revolutionary technology and has the potential to be very disruptive to many existing technologies and processes” I also believe that the stock’s valuations, even at these depressed levels from the recent highs more than reflect this potential.
That being said, I think the stock is likely closer to a trading bottom, as opposed to an attractive press on the short side. You guys know the old market saying, Q: What do you get when you try to pick bottoms??? A: Stinky fingers! Well the set up here with defined risk in the options market may be attractive as implied volatility in DDD despite the stock’s massive decline is quite cheap (that’s all relative.) From yesterday:
Looking at 30 day at-the-money implied vol in DDD, the price of options seem to be fair, despite being a 50 vol! The blue line below shows implied vol, the price of options, while the white line shows the actual movement of DDD, the realized. What is obvious is that as the movement has settled down, so have the prices of options. If you were of the belief that the movement was to pick up, then the prices of options could be perceived as cheap and an optimal way to express a directional view with defined risk.
- DDD 1 year chart of 30 day at the money implied vol (blue) vs realized (white) from Bloomberg
With all that said I am gonna make a trading call, not a fundamental call and look for a quick reversal in DDD.
TRADE: DDD ($56.32) Bought April 60 calls for 1.70
Break-Even on April Expiration:
Profits: above $61.70
Losses: up to 1.70 btwn 60 and 61.70, max loss below 60
Rationale: The selloffs in these stock go through a few phases with the last one generally being revulsion from longs that got in higher and can’t take the pain anymore. We may be in that phase today. If not, the call is a cheap shot with a much better risk profile than stepping in and buying the stock or a structure with short puts. This is a play for a reversal in the short term and will be treated as such.
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Original Post March 20th, 2014: Name That Trade: $DDD Needs Support
This morning 3D printing company XONE pre-announced worse than expected sales for the current quarter, sending its shares down 8.5%, and the shares of larger competitor DDD down about 3.5%. While we have acknowledged on a few occasions in this space that 3D printing is clearly a revolutionary technology and has the potential to be very disruptive to many existing technologies and processes, we have not been fans of the sector’s price action and valuation (Sagging DDDs from Jan15th and Three Dementia from Feb 25th).
Both stocks have gotten crushed this year, losing about a third of their market caps, signaling an investor shift from shear euphoria in 2013 to one of near desperation in 2014.
While the price action has been less than stellar of late, it also for the moment incorporates a bit of bad news. I think it is safe to say that investors’ expectations have come down dramatically, and with XONE’s warning today, its likely a forgone conclusion that it’s competitors will likely follow suit in the next month. Since the opening, XONE and DDD attempted to fill in the opening gap lower but both failed and now sit closer to the lows than the highs.
As for DDD, the stock has, for now successfully held a fairly important support level at $60, the very level that it had broken out from back in early November and registered 50% gains to its highs in January.
For those who think that negative sentiment in the space is a bit overdone, the technical set up could suggest a bounce back to 70. In that case, it makes sense to look to do so with defined risk given the potential for a negative tape bomb at any moment.
Looking at 30 day at-the-money implied vol in DDD, the price of options seem to be fair, despite being a 50 vol! The blue line below shows implied vol, the price of options, while the white line shows the actual movement of DDD, the realized. What is obvious is that as the movement has settled down, so have the prices of options. If you were of the belief that the movement was to pick up, then the prices of options could be perceived as cheap and an optimal way to express a directional view with defined risk.
With the stock now hovering just above $60, I want to wait and see how it responds on a break of $60, I would be more inclined to play for a reversal and a bounce then trying to press the stock back to the $50 support level.
While it is generally not a great idea to buy out of the money premium in a 50 vol name, it looks like the only way to play with defined risk, as long butterflies would be attempting to thread the needle a bit too much.
I am going to wait at the moment, but if I were to play for a bounce with the stock around $60 I would look to buy the April 65/70 call spread for about $1.00. Risking 1 to make up to 4 if the stock were to head back to obvious near term resistance.
We are definitely going to take our time on this one as we are not fans of valuation and the technical situation could be dicey at best, but with 25% short interest the slightest bit of good news could cause a sharp quick rally. We will keep you posted.