Applied Materials (AMAT) FQ3 Preview / Trade Ideas

by Dan August 16, 2018 1:58 pm • Trade Ideas

Applied Materials (AMAT) reports their fQ3 results today after the close, the options market is implying about a 5% one day move tomorrow in either direction, which is a tad rich to its four-quarter average one-day post-earnings move of about 4.25%, but well above the ten-year average move of about 3.5%.

With the stock at $47.50, the Aug 17th 47.50 straddle (the call premium + the put premium) is offered at $2.30, or about 5% of the stock price. If you bought that and thus the implied earnings move you would need a rally above $49.80 or a decline below $45.20 to make money.

Shares of AMAT are down 7% on the year, down nearly 24% from its 52-week highs made in March, have just bounced off of technical support near $45:

What’s interesting about the $45 support level is that it is also the intersection of the downtrend from the highs, which after its recent move above might also lend credence to $45 as a level the stock could bounce from. But the five-year log chart below shows just how crucial $45 as there appears to be an air pocket below to $40, and then no real support below there till $30:

Frankly, I don’t have a strong view on AMAT at current levels. Its a cheap stock at 10x expected 2018 growth of 32%, but I think it is important to look at what it’s trading vs FY2019, where eps growth is estimated to be flat on 2% sales growth. Investors are already pricing in a meaningful deceleration, and without upside guidance, I suspect the stock is likely stuck in the mid-$40s.


So what’s the trade?

Bullish: If I were inclined to play for a bounce post results tomorrow, and then possibly a sustained rally into Sept, I might consider a call calendar, selling tomorrow upside calls at the implied move and buying Sept of the same strike. For instance…

Trade Idea: AMAT ($47.50) Buy the Aug / Sept 50 call calendar for 70 cents

-Sell to open 1 Aug 50 call at 30 cents

-Buy to open 1 Sept 50 call for $1

Break-even on tomorrow’s close:

If the stock is 50 or lower the short Aug call will expire worthless. Depending on where the stock is and how many deltas the Sept call gained or lost that premium from the sale of Aug could offset or add to value of the Sept. The max risk of the trade is the 70 cents in premium paid, a full loss could result from a sharp decline below the current price or a sharp rise above the strike.

Rationale: the idea is to play for further consolidation with the ideal scenario that the stock rallies slowly towards the 50 strike by tomorrow’s close. Even if the stock is above the strike, the position can be profitable as the long call strike with more time value will also gain in deltas. The ideal scenario on tomorrow’s close is that the stock is 49.99, Aug expires worthless or covered for pennies, and the long Sept call has gained in value and now you are long a call in Sept that you can turn into a vertical call spread by selling a higher strike call in Sept, further reducing the premium at risk.


Bearish: if you are inclined to play for a guide down, and a break of $45, consider the following trade idea…

Trade Idea: AMAT ($47.50) Buy Sept 47 / 40 put spread for $1.50

-Buy to open 1 Sept 47 put for 1.70

-Sell to open 1 Sept 40 put at 20 cents

Break-even on Sept expiration:

Profits of up to 5.30 between 45.30 and 40, with max gain of 5.30 at 40 or lower.

Losses of up to 1.70 between 45.30 and 47 with max loss of 1.70 at 47 or higher.

Rationale: this trade risks 3.5% of the stock price to possibly make up to 3x the premium at risk if the stock is down 15% in the next month, back towards massive technical support.

A trade like this should only be attempted for those who are fairly convicted that the company will miss earnings and guide lower for the balance of the year.