A hard-hitting, bearish turn for the worse may have run its course in semiconductor chip upstart Ambarella (AMBA). Technical composure on the AMBA stock chart is hinting strongly of a bottom — and it’s time for AMBA bulls to consider a bullish put spread to seize the opportunity.
Image processing chip manufacturer Ambarella has seen its favor with investors come to screeching crash on the charts the past several weeks. Shares of AMBA stock are off more than 50% since late July’s all-time-highs of $129.19.
Behind the price plunge in AMBA stock, more than a few correctly positioned bears will tell you unrealistic valuations, possible competition from Qualcomm (QCOM), an earnings miss and September bombshell as Ambarella warned of lower revenues have all played a part in AMBA stock reeling to its corrective lows of $63.55.
The company is most closely associated with action sports camera manufacturer GoPro (GPRO), which has had its own fall from the overly-optimistic graces of go-go-growth stock manufacturing. But the good news is that AMBA stock could be ready to put a smile on bullish investors.
Ambarella is more than just a GoPro supplier. The company has positioned itself in the up-and-coming drone market, made potential inroads in areas like the autonomous, self-driving automobile niche with a recent private acquisition, and is still set to grow profits by a whopping 56% this year.
AMBA Stock Weekly Chart
The provided weekly chart of AMBA stock shows what typically happens to a growth story when things get a bit too hot.
Pull up monthly charts of names like Netflix (NFLX) or Amazon (AMZN) and it’s easier to appreciate the drop in AMBA stock. Even growth survivors and industry champions make it a far from easy technical ride for anyone but the most staunch buy-and-hold investor to fully capitalize on.
Without knowing if Ambarella has the fundamental wherewithal to be the next great chip story, I do see AMBA as being worthy of bullish traders’ attention right now.
What’s technically appealing is the stabilization AMBA stock has demonstrated the past two weeks with its tighter, inside trading action. The price support has occurred just above the 62% Fibonacci retracement level from AMBA’s May 2014 low, as well as the lower Bollinger Band.
It will be noted the current 50% correction in AMBA stock is deeper than the 30% to 35% decline common to growth stocks. That could be cause for some alarm of more troubling times ahead, but given the broader market’s own corrective activity, the larger drop can be considered less ominous.
AMBA Stock Bull Put Spread Strategy
For traders interested in nibbling on a bullish position in AMBA stock, an out-of-the-money put credit spread makes more sense than going long AMBA.
A vertical spread like a bull put spread in AMBA stock offers traders a limited risk position in a notoriously volatile name and the opportunity to profit even if shares of Ambarella don’t fully cooperate.
Reviewing AMBA stock’s options board, one spread which fits nicely with the price low and respects the slightly lower 62% Fibonacci price support is the October $65/$60 bull put spread for a credit of $1.75 or higher.
This trader is able to take in the full credit down to $65 in AMBA stock and breaks even at $63.25 at expiration. That’s slightly below the current pattern low, but a bit above the important 62% support level.
As the vertical is $5 wide, the max loss is $3.25 after factoring in the credit, if AMBA stock falls below $60. And if the Ambarella story really gets chipped away by bears? The trader can rest easier knowing exactly what’s at stake regardless of how bad it looks for AMBA stock.
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
