Ambarella (AMBA) is the poster child for growth stocks. Its ascent has been relentless. Its ability to recover from nasty bear raids has been epic. And its provided countless trading opportunities along the way.
Another such attractive setup in AMBA stock has cropped up this week.
Since recently retesting its all-time high a bout of profit taking has created a mild pullback in Ambarella shares. Yesterday, AMBA found support near its 20-day moving average, forming a classic bullish reversal candle.
Traders looking to get in on the action should be eying this dip with interest. It’s as good a time as any to initiate new bullish trades if you think the trend in AMBA continues.
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Given Ambarella’s penchant for volatile price moves, option premiums for AMBA stock consistently run hot. The one-year range for implied volatility is 43% to 77%.
In an age of a go-nowhere, do-nothing type of broader market — the S&P 500 has been meandering sideways for many, many moons — it’s refreshing to come across the occasional a stock that knows how to move.
The implied volatility rank for AMBA options currently is perched at the 55th percentile, suggesting premiums are juicy enough to sell in some fashion. Remember, when the IV rank is above 50, it simply means implied volatility is in the upper half of its one-year range, making options prices more expensive than normal.
The AMBA Trade
The clean pullback in AMBA’s stock price coupled with elevated option premiums creates an attractive opportunity to sell bull put spreads.
If you’re willing to bet Ambarella stays above $90 for the next month, sell the Sep $90/$85 put spread for 70 cents or better. The max reward is limited to the initial 70 cents and will be pocketed if both puts expire out of the money at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $4.30, and will be lost if AMBA falls below $85 by expiration. To minimize the loss, you could exit early if AMBA stock breaches the $95 support zone.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
