Name That Trade – $AMAT: Chips and Dip

by Dan April 27, 2015 3:14 pm • Commentary

Shares of Applied Materials (AMAT) are down 8% after the company announced that they were scrapping their previously announced merger.  On numerous occasions over the last few months we have highlighted what has been no shortage of large directional bullish options trades that we have seen in the market, as it appeared that investors were positioning for a late Q1 close of the deal that would result in large cost savings for the combined entity.  Today options volume is running 3x average daily with calls outnumbering puts 4 to 1.

Today’s move in the stock has brought it back to the nice round number of $20, on the largest volume day in more than 10 years:

AMAT yr chart from Bloomberg
AMAT yr chart from Bloomberg

The recent break of the uptrend that has been in place since late 2012 is notable, and generally it is not a great idea to buy a stock on the first day of a massive gap on volume.  

But the stock is fairly cheap trading at a little less than 16x expected fiscal 2015 eps growth of 17% on expected sales growth of 9%.  The company pays a dividend that yields 2%, and announced a share buyback of $3 billion which should start in mid May.

The next identifiable catalyst will be earnings in mid May, and it could make sense to look to finance the purchase of longer dated calls but call calendars just don’t have a ton in the way of May premium to sell from a dollar perspective. For instance, the May 22s are just 10c.

We’ll keep our eye on the stock as it seems any entry down near the 19 level could be a good spot to play for a move back above 20 and higher.