Name That Trade – $AMAT: Negative Electron

by Dan May 13, 2015 2:51 pm • Commentary

A couple weeks ago we took a look at AMAT after the stock’s decline on the announcement that they were scrapping their previously announced merger with Tokyo Electron (below). Over the last week the stock has seemed to find a bottom heading into tomorrow night’s fiscal Q2 results:

AMAT 1yr chart from Bloomberg
AMAT 1yr chart from Bloomberg

On a longer term basis, looking out two years, $18 was a big breakout level, and a spot the stock should find some support:

AMAT 2yr chart from Bloomberg
AMAT 2yr chart from Bloomberg

Options prices are relatively cheap, which is reflective of the fact that the implied move is in line with the avg over the last 4 qtrs. Thirty day at the money implied vol should come in close to 25% after the event, but well below levels prior to the last few reports:

AMAT 1yr chart of 30 day at the money IV from Bloomberg
AMAT 1yr chart of 30 day at the money IV from Bloomberg

As I stated in the previous post, AMAT is fairly cheap relative to its expected growth, with a healthy dividend yield, strong balance sheet and commitment to buyback $3 billion worth of shares.

Event: For tomorrow night’s earnings, the options market is implying about a 4% one day move (the May 20 straddle with the stock at $20 is offered at 80 cents, if you bought that you would need a move above $20.80, or below $19.20 by Friday’s close to make money).

My View: The 4% implied move is essentially in line with the 4 qtr avg move, but it is important to note that the last 2 qtrs the stock has not moved moved more than 1%, while the two prior quarters the stock gained 6% and 8% respectively. So it either moves a lot or it doesn’t move at all. The stock is now down more than 20% from the 52 week highs, wiping out most of the enthusiasm and bullish positioning that had taken place in front of an expected deal closing in late Q1. So sentiment went from white hot, to well bad.

The implied move looks fair to cheap to me. While we are generally not fans of long premium, short dated trades into events like earnings, risking 80 cents on the weekly straddle does not seem like a Herculean task to make money.

Gun to my head and the stock fills in the gap back to $22 in the coming days/weeks on the slightest bit of good news. A miss and guide down and the stock tests the 52 week lows just above $18.

With vol low, expectations low, and sentiment poor I like the idea of playing for a gap fill over the next few weeks. BUT no need to enter the trade today, let’s see where the stock is tomorrow prior to the close. If the report was tonight, and I was inclined to take a bullish view, this is how I would do it:

Potential Trade: AMAT ($19.92) Buy June 20/22 call spread for .53

-Buy 1 June 20 call for .67

-Sell 1 June 22 call at .14

Break-Even on June expiration:

Profits: of up to 1.47 between 20.53 and 22, with max gain of 1.47 above 22

Losses: up to .53 between 20 and 20.53 with max loss of .53 below 20

Rationale: This trade offers fairly near the money participation but caps gains at the gap from late last month.

But I want to make sure entry is correct and no need to step in a day ahead.

Check Back Tomorrow.



Original Post April 27th, 2015: Name That Trade – $AMAT: Chips and Dip

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.