Storage vendor NetApp (NTAP) is scheduled to report fiscal Q1 earnings today after the close. The options market is implying a healthy 6% move in either direction tomorrow, which is shy to the average 8.75% gain the day following the last four quarterly reports. What’s important here is that the stock has risen following the last four, but the gains have become increasingly muted since last August’s 17.44% rip following their Q1 report on Aug 17, 2016.
Shares of NTAP are up 46% in the last year, up 20% on the year. The chart since the start of 2016 is nothing less than constructive, a series of earnings gaps followed by a series of consolidations all along holding the one year uptrend:
But it wasn’t the one year chart that caught my eye but the 5 year, as the stock is up more than 100% from its 2016 lows with the stock having just coming short of the prior high:
NTAP is a cheap stock, trading 14x expected fiscal 2018 eps growth of 11% despite only 2% expected sales growth. The company has nearly $5 billion in cash on their balance sheet, nearly 45% if their $11.4 billion market cap (26% net of debt). The company has been in the crosshairs of activist investors in the past and could so again given the stock’s valuation and strong balance sheet.
So what’s the trade?
If I were inclined to play for a post earnings rally back towards the prior highs near $45 I would consider Aug call spreads:
Bullish Trade Idea:
Buy NTAP ($42.50) Buy Aug 42.50/ 45.50 call spread for $1
-Buy to open 1 Aug 42.50 call for $1.30
-Sell to open 1 Aug 45.50 call at 30 cents
Break-Even on Aug expiration:
Profits: gains of up to 2 between 43.50 and 45.50 with max gain of 2 above 45.50
Losses: up to 1 between 42.50 and 43.50 with max loss of 1 below 42.50
OR
If I were inclined to play for a pullback I might target $40 on the downside and look to mitigate elevated implied volatility into the print.
Bearish Trade Idea:
Buy NTAP ($42.50) Buy Aug 42.50/ 40 / 37.50 put butterfly for 50 cents
-Buy to open 1 Aug 42.50 put for 1.30
-Sell to open 2 Aug 40 put at 50 cents each, or $1 total
-Buy to open 1 Aug 37.50 put for 20 cents
Break-Even on Aug expiration:
Profits: up to 2 between 42 and 38 with max gain of 2 at 40
Losses: up to 50 cents between 42 and 42.50 & between 37.50 and 38, max loss of 50 cents below 37.50 and above 42.50
Rationale: this trade risks a little more than 1% of the stock price with very near the money participation on the downside.