Applied Materials (AMAT) – Chip Shots

by riskreversal November 17, 2016 2:19 pm • Trade Ideas

Yesterday, we previewed Applied Material’s (AMAT) fiscal Q4 earnings due after the bell. As we said, AMAT is one of the best performing stocks in the entire stock market in 2016. With the stock’s nearly 10% rally in the last week or so, it’s setting up near it’s 2016 high at $31, which might prove to be an inflection point, formidable resistance or a pivot point to new highs.

We want to detail two defined risk trade ideas that might capture the potential for a breakout, or breakdown out of the earnings event. 

First, for those looking to be long for new highs, it’s best to consider defined risk alternatives to owning stock here. The options market is implying a move of about 1.90 into tomorrow’s expiration:

Bullish/Long Stock Alternative:

AMAT (30.50) Buy the Nov 33/ Dec 30 diagonal call calendar for 1.25
  • Sell 1 Nov 33 call at .30
  • Buy 1 Dec 30 call for 1.55

The trade risks just 1.25 and can make up to 1.75 on a move to 33 or above on earnings. Additionally, it can set up for an even greater profit if the stock is higher but below 33 on tomorrow’s close. In that case the Dec call will be profitable and the Nov call will expire worthless, also at a profit. If the stock goes lower the most that can be lost is 1.25 and it’s unlikely that all of that will be lost unless the decline is substantial. This trade is about 40 deltas but if below 33 on tomorrow close can be spread by selling a Dec call and turning the trade into a vertical in December.


Bearish/ Hedge:

AMAT (30.50) Buy the Jan 30/26 put spread for 1

  • Buy 1 Jan 30 put for 1.35
  • Sell 1 Jan 26 put at .35

Rationale – This trade risks 4 to make 1 and is in January in case there’s some selling of big 2016 winners to start 2017. If the stock goes higher on earnings, this trade is of course binary and will be a loser but it shouldn’t lose all of its value on a normal move higher and tomorrow could be re-assessed, closed for a loss or rolled.