Two days ago we previewed Skyworks Solutions (SWKS) fQ1 earnings. We liked what we saw technically and fundamentally versus its peers and felt a good report could spring the stock higher with little resistance until 90. There was obviously event risk to the downside, but we felt that was somewhat asymmetrical with risk both ways but a bigger move more likely if that move was higher. We detailed a good trade strategy for that and similar situations:
Picking an entry in a stock like this is hard. For those sniffing around in the the stock and considering a new long, it might make sense to give yourself a little room to play for a breakout by selling a downside put and financing the purchase of an upside call. That way, any small movements within a range aren’t significant:
In Lieu of 100 shares of SWKS (78) Buy the Feb 72.5/82.5 risk reversal for even money
- Sell 1 Feb 72.5 put at 1.50
- Buy 1 Feb 82.5 call for 1.50
Rationale – This trade gives some room to the downside in case the stock declines on earnings. The put sale at the 72.5 strike is just above the support level of the 200 day moving average. Any move below and you are put the stock and own it for 72.50. So this structure is only for those willing to do that. A breakout above recent highs and this trade will act like stock above 82.50. For those whom margin requirements are a concern, the short put can be turned into a short put spread (e.g. by buying the 65 put) making the trade a slight debit, or to make it even once again the calls can be turned into a call spread.
SWKS reported better than expected earnings last night, and the report was highlighted by continued growth outside of the large mobile phone makers the company’s fortunes had been so closely linked to in the past. On the conference call they mentioned rapid growth in their internet of things divisions in particular. In our preview that was something we knew investors would be looking for:
Apple’s 10 year anniversary iPhone in the Fall could be a make or break growth moment for an industry that already established high penetration in the developed world and in the midst of a lack of innovation and seeing longer upgrade cycles. Which is why companies like SWKS are desperately trying to diversify into emerging technologies like Internet of Things and autonomous cars.
The stock is higher by more than 12% on the report. So let’s check back in on the trade idea and how to manage it. With the stock 88.30, the Feb 72.5/82.5 risk reversal is worth about 6.20 versus the original cost of even money. As far as trade management, it can obviously be closed for a nice profit. For those that want to continue the position, obviously the put can be closed. And then it’s a matter of taking some profits while continuing with some cheaper upside exposure. It probably makes sense to also close the Feb 82.5 call as it’s about 75 deltas. And then an interesting roll could be to a call fly in May, like the 90/105/120. That would book profits and re-establish position for a higher move. The cost of that fly is about 3.00. It books more than $3 in profits and leaves a position with only $3 of risk from here on out, with potential to make up to $12 on a continued move higher in the stock over the next few months.