Stock Overview – Sigma Designs (NASDAQ: SIGM)

Sigma Designs (NASDAQ: SIGM) is a provider of system-on-chip (SoS) solutions, which are used to deliver multimedia entertainment throughout the home. The company offered four product lines: media processors, home networking solutions, video image processors and home automation solutions.

SIGM’s earnings will be released Wednesday, May 25. The consensus estimate is $0.17 per share while the company expects its first quarter of fiscal 2012 revenues to be in the $60 million — $65 million range. Recent stock price momentum has been flat to negative, with SIGM losing about 18% over a three month period. That may be due to high short position taken by investors. If SIGM beats consensus estimate there could be an explosive move to the upside as investors flock to cover short positions. Our sentiment is to be long calls in the event the company has a much better than expected report.

Options Trade – Buy SIGM Jun 12.5 Calls

Options trading investors should consider buying the SIGM June 12.5 Calls for about $0.25, with the stock trading around $11.42, giving the investor the right to purchase 100 shares of stock at $12.50 a share for each option purchased. The investment breaks even when the stock trades at $12.75 (12.5 + 0.25 = $12.75) by expiration on June 17. The risk is the $0.25 paid for the call. The strategy has unlimited potential profit potential above $12.75 and a known risk.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.