A month ago, I put on a bearish trade in Google (read here), as it appeared the company’s mixed fundamental results in Q3, coupled with the stock’s inability to keep pace with the broad market, and the ominous technical set up (the death cross which is when the 50 day moving average crossing below the 200 day moving average). It was an attractive set up to play for a 5 to 10% pull back into year end. Since November 4th the stock is down about 5%, showing few signs of stabilization. This trade has led me to look for other similar set ups where the rally may be running out of steam.
Altera (ALTR) is a semiconductor company whose largest customers are Huawei in China and Cicso Systems (CSCO), equaling about 22% total.
ALTR has performed okay in 2014, up 13%. But despite trading near the 52 week highs the stock has massively underperformed its peers as the Philadelphia Semiconductor Index is up 26% on the year.
Looking at the one year chart you will notice what could have just been a failed breakout above previous highs and some slowing momentum as the stock’s 50 day moving average (purple line) converges with the stock’s 200 day moving average (yellow line):
The stock’s 21% gains off of the October lows, which were new 52 week lows, to last week’s new 52 week highs seems a tad excessive to me and I could see a sort of mean reversion trade back towards the mid point of the 6 week range, back near the converging moving averages.
ALTR also has two upcoming catalysts, management is speaking at Credit Suisse’s Tech Conference tomorrow at 11:30am, and then the company will hold their mid qtr update where they will likely narrow their guidance range. (Dec 10th after the close per their investor relations site here).
Looking at the options market, 30 day at the money implied volatility looks reasonably priced to almost cheap given the two upcoming catalysts:[caption id="attachment_48593" align="aligncenter" width="600"] ALTR 30 day at the money IV from Bloomberg[/caption]
With ALTR at $37, the DEC at the money straddle (long the 37 call and put) is offered at about $1.55. If you bought that you would need a move to $38.55 on the upside or to $35.45 on the downside to break-even. That’s about 4% in either direction in two and half weeks. That doesn’t exactly seem like a high probability trade. But with the stock near highs and possibly due for a pullback choosing a bearish trade could be the way to play.
New Trade: ALTR ($37.10) Buy the Jan 38/35/32 Put Fly for .90
-Buy 1 Jan 38 Put for 1.65
-Sell 2 Jan 35 put at .45 each or .90 total
-Buy 1 Jan 32 Put for .15
Break-Even on Jan Expiration:
Profits: btwn 37.10 and 32.90 make up to 2.10, max gain of 2.10 at 35
Losses: up to .90 btwn 37.10 & 38, and btwn 32.90 and 32, max loss of .90 below 32 and above
Rationale: This trade plays for a return back towards those converging moving averages. This has been a fairly big run-up in the stock but if it did just fail to breakout a pullback of a few dollars becomes realistic. Risking 90c means that you’re essentially shorting the stock from here to 35 but without unlimited upside risk. Obviously any moves higher and it’s a loser, or any serious gaps lower below 32.90. But that seems like good risk reward.