Trade of the Day: ON Semiconductor (ONNN)

by Bryan Perry | April 24, 2014 9:12 am

Trade of the Day: ON Semiconductor (ONNN)

Netflix (NFLX[1]) reported upbeat numbers this week that has money flow pouring back into the high-beta momentum names. I guess the hedgies just can’t stand to miss out on the action. If the momentum stocks rally anywhere near where they just cascaded down from, even I’ll be impressed. My take on any rally in the high-flyers is that it will be short lived and then undergo another pullback.

But again, if the market totally ignores the correction these stocks recently endured and they don’t come in, I’ll be very impressed. It is crucial that the leaders in the Internet and biotech space put up big-time sales figures because most of these stocks have no earnings to speak of. Netflix did have earnings — $0.86 per share in the first quarter — and trades with a price/earnings ratio (P/E) of 91x. Its shares corrected from $458 to $328 before recovering to $365 earlier in the week.

That’s quite a ride, but if animal spirit takes over, as does happen, then new highs for the major averages are not out of the question before this rally runs its course. It’s never smart to step in front of an oncoming train — and if earnings keep coming in above estimates, then the train coming down the track will be hard to stop.

As such, I remain cautiously bullish and continue to stay fully positioned in short-term covered calls for my Cash Machine Trader portfolio.

One of the sectors that has shown excellent relative strength in the midst of the tech correction that took down NFLX and other high flyers is semiconductors. Nvidia (NVDA[2]) is a standout here but another name within this group of current overachieving stocks that remain technically sound is ON Semiconductor (ONNN[3]), a maker of various chipsets for electronic systems and products worldwide.

ON Semiconductor’s chips touch just about every industry category in the economy. ONNN stock trades better than 7 million shares per day, and the company beat Q4 estimates by 21%, propelling the shares on their new uptrend. I recommend initiating a short-term covered call on ONNN by buying the stock at market on this minor pullback and selling to open the ONNN May $10 Calls at $0.30 per contract or better.

For every 100 shares of ONNN you own or purchase at market, use a limit order to sell to open 1 ONNN May $10 call at $0.30 or more per contract, good till canceled.

The option symbol is ONNN140517C00010000. If ONNN is trading above the $10 strike on the May 17 expiration date, the potential called-away return is approximately 6% in just about three weeks, depending on your stock entry point.

The NFLX’s of the world still need to prove themselves to me, but I uncover 8 to 10 names each month that make ideal short-term covered call trades, and ONNN is one of them.

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Endnotes:
  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. NVDA: http://studio-5.financialcontent.com/investplace/quote?Symbol=NVDA
  3. ONNN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ONNN
  4. Get the details here: https://order.investorplace.com/?sid=HT8888

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