When analyzing a company, you often want to both look at charts as well as the fundamentals of the company. That said, sometimes the analysts and speculators are not always right, so hunting down opportunity off the chart can be a more prudent decision.
Here is a trade idea that has a mixed fundamental outlook but a pretty good technical setup:
Western Digital (WDC — $64.38): Long Calls
The trade: Buy the Sep 65 calls for $2.65 or less.
The strategy: Buying a call option is generally used for a bullish outlook on a stock. For this trade to profit, the stock needs to move higher and the call premium needs to increase to an amount more than was paid. Maximum profit is theoretically unlimited because WDC can continue to rise, and the maximum loss is $2.65 or whatever was paid for the option if WDC finishes below $65 at September expiration. Breakeven is $67.65 at expiration based on a cost of $2.65.
The rationale: Western Digital develops, manufactures and sells digital storage products like hard drives. The company is thought to be in longer-term trouble because the hard drive industry is expected to shrink along with the decline in PCs and the rise of smartphones and tablets. Hard drives may be declining somewhat, but it is very doubtful if they will ever completely go away. Not to mention, the company just recently announced earnings, and although revenue declined for the quarter, full-year net income rose.
Click to Enlarge Taking a look at the chart, WDC has pulled back from its all-time high it set earlier in July. The significant thing about the pullback is where the stock has now potentially reversed — at an upward sloping trendline that can be considered support.
Technically, WDC still is in an uptrend because it is currently making higher pivot highs and lows. A bullish sigh for the stock would be if it can clear a pivot area (resistance) right round $65.50.
If it does, you might just want to save this trade idea on your hard drive … for fondness’ sake.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.