A Long Call That Makes Sense

by John Kmiecik | April 16, 2012 8:25 am

Traders and investors have been wondering when this market will pull back from its early 2012 bullishness. Many deemed stocks overbought and were waiting for a bearish correction.

At least a partial correction has come recently. Here is a trade idea that looks at the opposite side of that theory. This stock looks like it might just be oversold and priced at an attractive level for buyers.

InvenSense (INVN – $15.58): Long Calls

The trade: Buy the May 17.5 calls on InvenSense (NYSE:INVN[1]) for $1.30 or less.

The strategy: One strategy that can take advantage of a bullish outlook on a stock is buying a call option. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.30 if INVN finishes below $17.50 at May expiration. Breakeven is at $18.80 at expiration.

The rationale: INVN makes motion-processing ICS and related software for consumer electronics devices for the computer video gaming industry. It owns about 70% of the market share for motion sensors in Android-based phones. The company just started publicly trading in November and has more than doubled its price at one point. Last week, SanDisk (NASDAQ:SNDK[2]), which is the biggest maker of flash memory cards, cut its sales forecast. This had an effect on INVN, causing the stock to drop in price. The stock looks like it now might be a little oversold.

This might be a little bit of a speculative play since the stock has not been trading very long, but there are a couple of things that look good about this trade idea. INVN has fallen to an area where it came down to back in early March. This looks like a potential double-bottom possibly setting up, which normally is bullish. A bullish reversal sign would be if the stock can trade over $16. A bearish sign for the stock would be if it trades below $14.40, which was a recent pivot low. The stock has previous highs around $22. It would be nice if INVN would motion itself higher to that level again!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

Endnotes:
  1. INVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=INVN
  2. SNDK: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNDK

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