Opting for OmniVision Calls Ahead of Earnings

by Joseph Hargett | May 31, 2012 8:53 am

Opting for OmniVision Calls Ahead of Earnings

You may not have heard of OmniVision Technologies (NASDAQ:OVTI[1]), but if you’ve used a smartphone, you’ve likely used one of its products. OmniVision makes it possible for your smartphone to take high-resolution photographs and video. In short, it has shrunk an entire camera down to the size of a single chip.

More important, OmniVision long ago scored a supply deal with Apple (NASDAQ:AAPL[2]) to provide camera -chips for the insanely popular iPhone.

Unfortunately for OmniVision, Apple moved away from OmniVision’s chips with the iPhone 4S, opting instead to go with Sony (NYSE:SNE[3]) technology. OmniVision was selected for the latest iteration of the iPad, but the lower volume will most likely have an impact on the company’s bottom line.

Investors will find out just how big of an impact Apple’s move had after the close of trading this afternoon, when OmniVision releases its fourth-quarter earnings report. Analysts are expecting a profit of 22 cents per share, on average, down more than 60% from last year’s profit of 57 cents per share. Furthermore, revenue is expected to decline roughly 20% to $206 million.

Expectations may be set a bit higher, however, as the whisper number is forecasting earnings of 25 cents per share, three cents better than the consensus. Overall, analyst ratings reflect these higher expectations, as 20 of the 25 brokerage firms following OVTI rate the stock a buy or better, versus five holds and no sells.

This ratings configuration is somewhat suspect, given that OVTI closed 20 cents above the consensus 52-week price target of $15 on Wednesday. In other words, the stock could soon be the target of downgrades or price-target increases, which will likely be heavily influenced by tonight’s quarterly earnings report.

The bullish outlook ends with the brokerage community, though. For instance, despite a 3.3% decline in the number of OVTI shares sold short during the most recent reporting period, a hefty 17.6% of the stock’s float remains sold short. Plus, OVTI’s put/call open interest ratio for the front three months arrives at 1.32 — a reading higher than 70% of all those taken in the past year, according to data from Schaeffer’s Investment Research.

Taking a closer look at OVTI’s front-month options reveals a considerably more bearish backdrop. Specifically, the stock’s June put/call open interest ratio arrives at 1.41, with 72,382 puts open versus 51,116 calls. That said, more than 30,000 of these puts may have been open for quite some time, since they are concentrated at the deep in-of-the-money June 19, 20 and 21 strikes. Peak June call open interest, meanwhile, totals about 10,300 contracts at the out-of-the-money 17 strike.

Selecting an option strategy for OVTI ahead of earnings could be tricky. Earnings expectations among the analyst community appear to be high, but the stock could be in line for a few price-target increases following a solid report. What’s more, a rally could also spook short sellers into covering, creating a bit of a short squeeze for OVTI. And while the stock’s 27% plunge from its early-April peak has created some havoc for options traders, it has resulted in a bit of an oversold situation.

Given this backdrop, it would appear that OVTI has greater upside than downside potential in the wake of the company’s quarterly report. Therefore, a July 15/16 bull call spread could prove quite profitable. This spread was last offered at 50 cents, or $50 per pair of contracts, placing breakeven at $15.50 — a gain of 1.9% from Wednesday’s close. Meanwhile, a maximum profit of 50 cents, or $50 per pair of contracts, is possible if OVTI closes at or above $16 when July options expire.

Endnotes:
  1. OVTI: http://studio-5.financialcontent.com/investplace/quote?Symbol=OVTI
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE

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