Profit on the Recent SNDK Surge With This Debit Spread

by John Kmiecik | January 10, 2014 9:02 am

Profit on the Recent SNDK Surge With This Debit Spread

It seems as if the market is having trouble finding a direction so far in the New Year. But some stocks seem to be having no trouble whatsoever. Here is a trade idea on a stock that looks like it has some more upside potential after a bullish move — SanDisk (SNDK[1]).

SanDisk (SNDK) Call Debit Spread

The trade: Buy the January 72/74 Bull Call Spread (buying the January 72 call and selling the January 74 call) for 95 cents or less.

The strategy: The maximum potential profit for this trade is $1.05 ($2 – $0.95) if SNDK stock is trading above $74 at January expiration. The maximum loss is $0.95 (or what was paid for the spread) if SNDK stock is trading below $72 at January expiration. Breakeven is $72.95 at expiration based on a cost of 95 cents.

The rationale: If you didn’t know, SNDK designs and manufactures flash storage card products that are used in various electronic devices. Earlier this week, the company was upgraded to a “strong buy” by an investment research group. The firm based its upgrade on the positive earnings the company has achieved over the past four quarters, beating estimates by an average of about 28%.

SNDKchart 300x121 Profit on the Recent SNDK Surge With This Debit Spread
Click to Enlarge
In late October, the company invested in Magisto, a popular video editing app with approximately 12 million users. Only time will tell if this move will be profitable, but the company believes that video editing still has a huge untapped market opportunity.

Since this trade idea is relatively short-term, it is based on what Sandisk’s chart currently looks like after a huge breakout on Wednesday. SNDK stock broke through a resistance area right around $71 on the upgrade.

SNDK stock dropped some the next day, which could be the result of profit taking, but it was able to close in the top third of the previous day’s move which is a bullish sign. The stock has traded higher before and there is no more immediate resistance that might keep it from moving higher.

SNDK is scheduled to announce earnings on Jan. 22, and this debit spread expires before the announcement. A debit spread lowers the overall risk on the trade compared to an at-the-money long call, and it also gives the option trader a decent profit potential.

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[2].

Endnotes:
  1. SNDK: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNDK
  2. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

Source URL: http://investorplace.com/2014/01/sndk-stock-sandisk-stock-spread/
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