We’ve said it before and we’ll say it again: “A bad or rotten apple of a market shouldn’t preclude shopping around” for a good value play.
And once more, Cirrus Logic (CRUS) is making the case for bullish investors to consider CRUS stock in their portfolios.
On a day when Apple (AAPL) was off a bitter 3% on Google (GOOGL) device competition news and an iPhone 6s sales launch that wasn’t sweet enough to mollify shareholders, Cirrus Logic was off a very modest 0.6%.
The price action in CRUS was impressive in the face of Tuesday’s news. It also was inspiring because it’s normal to see larger price volatility in shares of Apple’s much smaller component suppliers — like Cirrus Logic.
Cirrus Logic has continued to add value for shareholders since we last penned our bullish view of why CRUS stock looked ripe for a bullish collar.
Most of the (re)added price increase in CRUS stock comes from a report that launched shares by more than 14% this past Friday. An iPhone 6s “teardown” surprisingly revealed the new iPhone 6s contains two of Cirrus Logic’s audio integrated chips — up from just one in the iPhone 6.
Given the rotten market environment and CRUS’ 11% gain since our prior analysis, we are slightly more cautious, but nonetheless are compelled to see more upside in Cirrus Logic.
CRUS Stock Daily Chart
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In our view, the bottom is a convincing one as last Friday’s heavy volume confirmation follows a higher-low hammer candlestick pivot off a 35% corrective move and 62% test of Fibonacci support. All told, Cirrus Logic stock has made all the right moves and shown strong investor interest in doing so.
Additionally and also viewed favorably, Cirrus Logic’s recent relative strength has occurred while the broader market has quickly retreated back toward the Aug. 24 “mini flash crash” lows.
Working against bulls at this juncture, two concerns are the market’s ability to hold its lows and Cirrus Logic’s recent moving average-based “death cross.”
To address those worries, we should wait for a bit of extra price confirmation in Cirrus Logic stock and/or the broader market, and we should use a bull vertical spread as our approach.
Cirrus Logic Stock Bull Call Spread
The Nov $31/$35 call spread for $1.60 is priced for success.
Currently the bull call spread is priced for $1.35. Given this vertical’s directional risk of 25, we can estimate that the spread’s value will be $1.60 if Cirrus Logic moves up by $1 (just more than 3%) to $31.45.
Using price confirmation such as this will result in missing the initial upside in Cirrus Logic. However, the intention is to steer clear of smaller reactions below the 200-day simple moving average and death cross, which are viewed as being more prone to failure.
Should a trader buy this spread for $1.60, the profit potential is $3.40 should Cirrus Logic stock climb through $35 at expiration.
The November spread also has the advantage of being positioned for Cirrus Logic’s earnings report, which is due in late October or early November. Lastly, it’s also timed for the onset of the market’s “Best Six Months” calendar period — and optimistically, a meaningful low in place for the broader averages.
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.
