Ambarella (AMBA) shareholders are getting schooled in some good ol’ Wall Street physics today.
Despite recent evidence to the contrary in AMBA, gravity does in fact exist. And once it decides to exert its inescapable pull, things always turn nasty.
Ambarella stock is 20% off its highs in the past two days alone and don’t think it can’t get worse. One of the problems with such a swift ascension is it leaves little by way of support on the way down. Heck, the next major potential floor in AMBA isn’t until around $77.
Now, that isn’t to say it won’t bounce sometime before then, but it does illustrate the elevated risk of buying a stock that has already risen so high — you can’t bank on any key support levels to stem the decline on the way down.
The heavy volume accompanying the downturn certainly adds some further oomph to the swoon. This isn’t a mild bout of profit-taking we’re talking about here, but some major distribution. The type that tends to stick around to weigh on the stock for weeks to come.
If you climbed aboard the AMBA train early you still probably have profits aplenty so the recent decline isn’t a complete bust. It’s the late-to-the-party-charlies who are really feeling the pain. But seriously, those who were buying this thing in the $120s after such a meteoric rise need to have their head examined.
Active traders who are observant may have been saved from today’s bloodbath. AMBA did flash warning signals aplenty all day Friday to those who were paying attention. It tumbled all day ending with an ominous looking bearish engulfing candle on record high volume. If there was ever a sign that a stock’s gravity defiance campaign is ending — that’s it.
Despite the awful bearish developments of late, the bigger picture in Ambarella stock is still quite bullish. At some point this dip becomes buyable. I’m eyeing the 50-day moving average near $88 or even the low $90s as an area where bullish plays start to become interesting.
My strategy of choice at that point would be selling out-of-the-money bull put spreads to exploit the high implied volatility and have a high probability of profit. If you think AMBA rebounds before the $80 level, consider selling the Jul $80/$75 put spread for more than 50 cents if you can get it. You’ll capture a 10% return with a really high chance of success.
Be forewarned, however, AMBA options are very illiquid so limit orders are a must and it may take a bit of time for your orders to fill.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
