Opportunity Amid the DDD Stock Drop

by Tyler Craig | November 21, 2013 12:14 pm

Opportunity Amid the DDD Stock Drop

The parabolic rise of 3D Systems (DDD[1]) came to a crashing end this week. And market participants shouldn’t be surprised. Such is the eventual destiny of all stocks rising to dizzying heights with nary a pullback. The sky-high price finally leads to a buyer’s strike and everyone rushes for the exit doors en masse. DDD stock was no different.

Since peaking at $84.85 on Monday, the world’s most popular company among 3D printing stocks had tumbled roughly 18% before bouncing back today. DDD wasn’t alone. Other 3D printing stocks such as Voxeljet (VJET[2]) and ExOne (XONE[3]) are solidly in the red since Monday, at -37% and -8%, respectively.

And yet, for all its fury, the pullback in DDD stock never even breached the 20-day moving average. That alone should tell you how ridiculously extended the stock had become.

So, despite this week marking the end of DDD’s latest upswing, it’s obviously far too early to tell if it’s the end of its trend.

Should 3D Systems stock decide to resume its plunge, it will eventually run into some massive support levels in the $50-$55 range. While that might give little comfort to those who purchased shares in the $80 region, it does provide opportunity aplenty to spectators on the sidelines eying the ongoing pullback with interest.

ivDDD Opportunity Amid the DDD Stock Drop
Click to Enlarge

I’ll suggest a trade in a moment, but first allow me to add to the allure.

The final stages of the advance in DDD stock — and its subsequent death drop — have predictably led to a groundswell in demand for options. This uptick in buying interest has driven implied volatility from its post-earnings lows of 42% to as high as 57%.

In light of the elevated implied volatility, option sellers are now being compensated with much bigger premiums.

DDDchart Opportunity Amid the DDD Stock Drop
Click to Enlarge

Traders willing to bet DDD doesn’t give back all of its recent gains have some seriously compelling high-probability trades worth considering.

Sell the Dec 55 put for 60 cents. If DDD stock remains above $55 by December expiration, you will pocket the $60 premium. With the Dec 55 put boasting a delta of 7, the options market is pricing in about a 93% probability that it will expire out-of-the-money. Not too shabby!

If you’re a willing buyer of DDD, you could allow assignment if the put sits in-the-money at expiration, which would give you a cost basis of $54.40 ($55 – $0.60). That’s a 25% discount to DDD stock’s current price.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

Endnotes:
  1. DDD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DDD
  2. VJET: http://studio-5.financialcontent.com/investplace/quote?Symbol=VJET
  3. XONE: http://studio-5.financialcontent.com/investplace/quote?Symbol=XONE

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