Merrill Lynch just printed a boatload of profits for 3D Systems Corporation (DDD) shareholders. The gift came in the form of an upgrade shifting Merrill’s rating on DDD from Underperform to Buy.
Shares rallied as much as 19% before paring back gains slightly, no doubt on profit-taking from giddy bulls wanting to cash in on their good fortune.
What’s particularly impressive is that the profit fest comes after DDD had almost tripled from its mid-January low of $6. So, yeah, consider today’s scorcher the exclamation point at the end of an incredibly bullish sentence.
While the popular 3D printing stock remains a far, far cry from its peak it’s done one heck of a job resurrecting itself this year. 3D Systems does report earnings on May 5, so time will tell if the buying binge that has taken the stock by storm is justified by a continued earnings recovery.
While I’d love nothing more than to pile into DDD here, prudence dictates caution. The stock is overbought by darn near any measure, providing a poor risk/reward entry for spectators looking to join the bullish herd. A pullback or some consolidation in the coming days would do wonders in generating a lower risk opportunity.
Were I an owner of 3D Systems with the good fortune of scooping up shares in the single digits, I actually would consider ringing the register here. The massive volume accompanying today’s rally could be signaling exhaustion.
Short DDD Puts for Cash
If you think the recovery in DDD stock has staying power, consider selling out-of-the-money puts. The naked put play essentially allows you to get paid for your willingness to buy shares at a discount, a potential win-win for would-be buyers of the stock.
Sell the May $15 put for 70 cents or better. The max reward is limited to the initial 70 cents and will be captured if DDD sits above $15 at May expiration.
The risk is that you have to buy 100 shares at $15 if 3D Systems sits below $15 at expiration. Since you received 70 cents your cost basis would actually be $14.30, which may not be a bad area to go long the stock, especially if this uptrend continues in the months ahead.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
