Tough Times for Chips

Chipmakers look headed for a gap down. Play it with puts

   

The Philadelphia Semiconductor Index (SOX) has taken the lead for the worst-performing sector for September, down nearly 6% on the month and nearing seven-week lows. My scans indicate there’s more trouble ahead for the beleaguered sector. Consider my latest results for some of the names in the industry:

  • Sell watch for Applied Materials (NASDAQ:AMAT)
  • Sell watch for Avent (NYSE:AVT)
  • Sell watch for Texas Instruments (NASDAQ:TXN)
  • Sell watch for QLogic (NASDAQ:QLGC)
  • A problem stock rating for NVIDIA (NASDAQ:NVDA)
  • Intel (NASDAQ:INTC) is rated among the weakest stocks
  • Advanced Micro Devices (NYSE:AMD) is a reconfirmed sell

My analysis revealed an undervalued — and cheap — put option play in chip manufacturing equipment maker Lam Research (NASDAQ:LRCX).

I recommend buying the LRCX Dec 30 Puts at $1 or lower, where they are currently trading. But be careful: Open interest and volume are light in this name, so using a limit order can help ensure that you don’t overpay.

LRCX is currently trading in the mid-$31 area, but my downside target is $30.20 before December expiration — though I look for this trade to resolve a lot sooner, probably in a matter of weeks. So, take profits in the trade if the stock dips down to my target or if the put options appreciate to $1.80.

To protect yourself and escape with a fair amount of capital if the market’s uptrend resumes, exit the trade if LRCX stock closes above $33.70, or if the put drops to 70 cents.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/tough-times-for-chips/.

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