Yesterday, prior to NetApp’s (NTAP) Q3 results, we previewed the event (here), and concluded that the stock’s cheap valuation, rock solid balance sheet, poor multi-year performance, prior activist interest and current m&a environment could make defined risk long biased trades attractive. While we were not willing to take event risk, the quarter and guidance that was reported was NOT worse than expected and the stock is roughly unchanged on the day.
At this point it is safe to assume that there will be little stock specific fundamental news in the coming weeks, which like the call calendar we detailed yesterday, set ups for the financing of longer dated calls. We are now going to move the strikes down a tad and move the expirations out a bit.
Here is our trade:
*NTAP ($30.75) Buy Dec / Mar 33 Call Spread for .90
-Sell to open 1 Dec 33 call at .30
-Buy to open 1 March 33 call for 1.20
Rationale – This trade finances March upside calls by selling December of the same strike. The ideal scenario is that the stock grinds higher towards 33 over the next month into Dec expiration. The 90c premium paid for the calendar is the max risk on a sharp moves lower or a a gap move substantially above 33. If we get to Dec expiration and the short Dec call has offset the decay in the long March call we will then look to either turn into a diagonal calendar by selling a higher strike call of a shorter dated expiration, or turn into a vertical spread by selling a higher strike call in March expiration.