Chart of the Day – $AMAT: Market Makers Pricing Movement

by Dan August 14, 2014 3:03 pm • Commentary

AMAT is set to report their fiscal Q3 earnings tonight after the close.  The options market is implying about a 5% one day move which is rich to the 4 qtr avg of a tad less than 4% and a good bit lower than the 8 qtr avg of 2.7%.  The move seems high, but when you consider the recent options activity, it appears that some market participants are playing for a re-test of the recent highs above $23.  For example, here was what we said in the Too Many Options post detailing yesterday’s action:

AMAT – The options market is implying about a 4% move.  Yesterday morning, the Jan15 22 calls traded 25k for 1.38, and the Jan15 24 calls traded 45k at 0.75.  Also in the morning, but as a separate print, the Oct 22 calls traded 30k at 0.80.  AMAT’s high of the year is $23.46.

Technically the stock is trading at the lower end of its uptrend channel that has been in place since December 2012, evidently a good spot to buy at any point over the last 18 months:

AMAT 2 year chart from Bloomberg
AMAT 2 year chart from Bloomberg

Back in November, Enis wrote a Deep Dive post on AMAT delving into the fundamentals and valuation of the company.  This was his takeaway:

A lot of seesawing back and forth, with growth during macro upswings, and contraction during macro downswings.  Analyst consensus projections are for $1.12 in EPS for 2014, $1.35 for 2015, and $1.79 for 2016.  If AMAT can actually fulfill those projections, then the stock is most certainly cheap.  Given that the company has not been able to string together more than 2 consecutive years of earnings growth in the past decade though, the odds of such future consistency seem quite low.  At 25x 2013 EPS, AMAT hardly feels like a bargain, with plenty of uncertainty to boot.

Since then, 2014 EPS is expected to be around 1.08 for the calendar year.  2015 expected EPS is still slated for $1.35, though analysts have reduced the 2016 estimate down to around $1.50.  In any case, AMAT has rallied nearly 20% since November, but earnings estimates have not moved higher.  Against that, the positive is that the macro backdrop for semiconductors has improved in the past year, and AMAT’s past 2 earnings reports have been solid.

I have no strong fundamental view on the stock, the set up looks decent for a bounce, but the options are a bit tricky.  For instance all of that call buying yesterday yesterday might have spooked market makers a bit, causing them to price the move a little aggressively.  In vol terms the options look expensive for instance, with the stock at $21.15 if you bought the Aug (tomo exp) 21 straddle it would cost you 1.00 (buying the Aug 21 put for .42 and the Aug 21 call for ..58) and you would need the stock below 20 on the downside or above 22 on the upside to just break-even.  But anywhere in between 20 and 22 you lose 1.00 or about 5% of the underlying stock price.  You see my point??

For those speculators, upside calls seem dollar cheap with the Aug 22 calls offered at .16 and the Aug 20 puts offered at .14, but ago they are lottos and you need to not only have direction right but magnitude of the move and timing, which there isn’t much on the weeklies.

No strong view, no trade.