Considering Our Options – $ALTR Jan Put Fly

by CC December 17, 2014 2:26 pm • Commentary

Two weeks ago we initiated a short biased trade in ALTR looking for the stock to consolidate after a pretty significant move higher from Oct lows. We chose an in the money butterfly as we weren’t looking for fireworks, merely a momentum shift. Here was the trade and rationale at the time (also, the full original post is below):  

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

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.

The stock is pretty much unchanged and mark to market the trade is basically unchanged. As we get closer to expiration, the more the 38 put matters and the less the 35 and 32 puts matter. What that means is that the short deltas will increase in this trade every day that the stock is under $38.

This trade was fairly binary even when we initiated as it was essentially shorting the stock where it was with defined risk (the breakeven on this trade is 37.10) but that binary nature was buffered by the fact that it wasn’t 100 deltas like shorting the stock would have been. That means that if the stock went up we could be patient. As we get closer to year end and into Jan that becomes less of a crutch.

So we’ll be keeping an eye on this trade as we could still probably absorb a move higher towards 38 (like a few days ago) but we lose that luxury as time moves on/ So the leash will get shorter and shorter.

If the stock goes down from here we’d likely take profits on any move towards the midpoint of the structure at 35, no matter the timing.

 

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):

ALTR 1yr chart from Bloomberg
ALTR 1yr chart from Bloomberg

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 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.