Momentum traders have been bidding up 3-D printing companies. When that happens, be on the lookout for costly options pricing — and the chance to take advantage for your portfolio.
Those with a penchant for volatility and high-growth securities have increasingly embraced the likes of 3-D Systems (NASDAQ:DDD), Stratasys (NASDAQ:SSYS), and Proto Labs (NASDAQ:PRLB). Alongside the monster rise in price, trading volumes have also soared — particularly in DDD.
Of course, even the most promising momentum titans won’t rocket higher uninterrupted. Gravity will inevitably exert its influence from time to time, dragging these highfliers down a notch or two. We’ve seen just such a correction over the past two weeks, with DDD falling as much as 25% after reaching an all-time high in mid-January at $71.98.
So far the bout of selling has been somewhat contained; DDD was able to bounce at its rising 50-day moving average. Furthermore, its longer-term uptrend remains intact.
Alongside the recent slide in the stock price, option premiums have been ballooning. Increased demand for protection has driven the implied volatility of DDD options to the upper end of its two-year range.
With earnings looming on Feb. 25, it’s a good bet the uptick in demand has also been a result of traders jockeying for positions in anticipation of a big move following the release.
As a result of the sky-high volatility, some interesting short option plays are presenting themselves. And as a bonus for those unwilling to brave the earnings gap, you can use February options to structure your bet — they expire before earnings are actually released.
Selling bull put spreads will exploit the elevated volatility and the propensity for a rebound in the stock price over the next two weeks. Traders can sell the 55-50 February put spread for around $0.55.
To initiate the position, sell the February 55 put while buying the February 50 put. The max reward is limited to the initial $0.55 and will be captured provided DDD remains above $55 by February expiration next Friday. The risk is limited to $4.45, but you could exit at a much smaller loss if DDD breaks below the higher strike price of the spread — $55.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.