NXP Semiconductors NV (NASDAQ:NXPI) is a company squarely in one of technology’s sweet spots, and a strong technical base has put NXPI in position for higher prices.
Aside from beating Street earnings forecasts late last month and continuing its tradition of not disappointing on that front, the semiconductor outfit looks well-positioned to climb higher based on the company’s dominant position within one of Wall Street’s next, big, big things: namely, the Internet of Things (IoT).
A NXP bull call spread makes the package more compelling.
IoT & NXP Semiconductors
In an interview with Barron’s this past Thursday, NXP Semiconductors CEO Rick Clemmer said investors don’t fully understand the Internet of Things — the growing network of interconnected devices, including once-basic home goods such as toasters and refrigerators — and its significance as an emerging growth area within the marketplace.
That same day, CNBC’s Jim Cramer declared NXP a “Must Own!” Thursday’s latest and strong NXPI stock endorsement was based on stronger-than-expected iPhone 6 demand. As one of Apple Inc’s. (NASDAQ:AAPL) chip suppliers, NXP stands to reap those benefits as well.
To be fair, aside from NXP, similar Apple-based “Must Own!” props were given to Skyworks Solutions Inc (NASDAQ:SWKS), Avago Technologies Ltd (NASDAQ:AVGO), Qorvo Inc (NASDAQ:QRVO) and Cypress Semiconductor Corporation (NASDAQ:CY).
NXPI Weekly Chart
Since putting in a massive 63% correction back in 2011’s second half, shares of NXPI have gone on to eclipse their former all-time highs and rally by more than 700%. Notwithstanding the gargantuan gains over the past three-and-a-half years, it hasn’t entirely been a straight line higher for NXP bulls.
As the NXPI chart shows, highlighted in yellow, there have been other corrections of fairly good size along the way. The good news for bullish NXP investors: The most recent correction of 27% took out the lows of the multiweek base immediately preceding it.
Markets work in cycles, and base count resets are an inevitable part of how stocks like NXPI move over the course of time. And when this type of activity occurs, as it did in NXP, it effectively resets the base count to zero, in theory giving shares a fresh start.
Based on what’s transpired technically, the current 12 weeks in NXP constitute a high-price-level base, but it’s still a “first” base (and thus a sturdier base) because of October’s corrective slide and base reset.
NXP Bull Call Spread Strategy
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Straight long calls, as evidenced by the volatility chart, suggest NXPI option premiums are affordable. Implieds are at historic lows and slightly below the stock’s volatility, which is at the low end of its historic trading range.
However, given the run in NXPI and wanting to err on the side of being cautiously optimistic; after checking the option board for position ideas, the July $105/$110 call vertical for $2.60 mid-market is attractive.
A maximum reward of $2.40 at expiration — collected if NXPI finishes above $110 — works out to a return of 92%. At the same time, a NXP long $105 call for $6.10 would still be underwater with a small loss at the vertical’s short $110 strike.
Defensively, should NXP fail to move higher and simply sit, the spread is comprised of intrinsic value at current levels. Right now this amounts to $2.25 of the $2.60 paid. Thus at expiration, the trader holding this NXP spread would be out only 40 cents.
Finally, if NXP stock did the unthinkable and slumped lower into the base or triggered an actual breakdown, the softer directional bias of the vertical should allow you to manage the position and take a slighter loss than the max amount, equal to the debit paid for the spread.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
