Update – Applied Materials (AMAT) Chip Rip

by CC March 21, 2019 2:43 pm • FREE ACCESS• Trade Updates

On March 12th’s Fast Money one discussion was on the semi conductor stocks. Dan mentioned Applied Materials (AMAT) and the next day wrote here on RiskReversal with two different ways to express a bullish idea. Here were those two trades, from March 13th, when AMAT was 38.93:

A call spread in May:

AMAT ($38.93) Buy May 41 – 46 call spread for $1

-Buy to open 1 May 41 call for 1.25

-Sell to open 1 May 46 call at 25 cents

and an April/May call calendar:

AMAT ($38.93) Buy April – May 42 call calendar for 60 cents

-Sell to open 1 April 42 call at 35 cents

-Buy to open 1 May 42 call for 95 cents

With AMAT now higher, trading 41.80, both are looking good. Let’s check in on both with an eye towards trade management. First, the May 41/46 call spread. it is now trading 1.90, a nice gain from the 1.00 originally at risk. Intrinsically it is worth 1.80 and with expiration not until May decay is not a concern. Therefore this is in really good shape for further gains if the stock continues higher. Those wanting to make sure it doesn’t become a loser if the stock goes lower should simply keep a mental stop and make sure the stock doesn’t get back below 40.

The April/May 42 calendar is in an interesting spot, trading .80 versus the initial .60 at risk. But it’s in really good shape to make more as the April 42 calls do not capture earnings while the May calls are earnings week. As with all calendars the more patient you can be with the near term short calls the better this can work out. The stock going sideways over the next few weeks is ideal, slightly higher great, even slightly lower is decent. The real risk here as always is a big gap higher through 42 or a big move lower. The April 42’s are currently around 1.25 and it’s all extrinsic premium at the moment. So a tight stop higher, not letting this thing get too far above 42 is in order. If the stock does get above 42 a roll from the short April 42’s to a higher strike call in May would make sense. But for now patience will be rewarded