Western Digital Corp: Hop Aboard for a Ride on This Struggling Bull (WDC)

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Technology stocks find themselves in a bit of a precarious position in the wake of the dismal second quarter from Apple Inc. (AAPL). Selling pressure is sure to follow in Apple’s wake, leaving Western Digital Corp (WDC) a hard crowd to win over when it steps into the earnings confessional after the close tomorrow night.

WDC Stock: Hop Aboard for a Ride on This Struggling BullCurrently, Wall Street is forecasting earnings to fall 31% to $1.28 per share from $1.87 in the year-ago period. Revenue, meanwhile, is seen falling 19.3% to $2.86 billion.

There are whispers of better-than-expected results, however, and Western Digital’s third-quarter whisper number comes in at $1.33 per share.

Pulling back for a broader view of WDC stock’s sentiment backdrop, we find a wealth of bullish sentiment. In fact, Thomson First Call data reveals that 21 of the 30 analysts following Western Digital stock rate the shares a “buy” or better, with no sell ratings to be found.

Furthermore, the 12-month consensus price target for WDC currently rests at $67.20 — a whopping premium of 51% to yesterday’s close. As you can see, there is considerable risk of downgrades or price-target cuts if Western Digital falls short of the mark in either earnings or guidance.

Short sellers apparently don’t see eye to eye with the brokerage bunch: As of the most recent reporting period, some 30.2 million shares of WDC were sold short, representing nearly 13.1% of Western Digital’s total float.

04-27-2016 WDC stock
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If the price action in WDC were more impressive, there might be reason for short sellers to be concerned. Technically, however, WDC has struggled to stay afloat the better part of the past year.

Since April 2015, Western Digital stock has shed more than 53% of its value. Currently, shares are hovering just above support in the $40 region, while resistance remains overhead in the staunch $50 region.

Options traders are sending mixed signals when it comes to expectations for Western Digital’s post-earnings move. For instance, the April/May put-call open interest ratio has ballooned to 1.05, with puts outnumbering calls among near-term options. However, that ratio plunges to 0.47 for the weekly April 29 series, which is most affected by Western Digital earnings.

Overall, weekly April 29 series implieds are pricing in a potential post-earnings move of about 7.5%. This places the upper bound at $47.83, while the lower bound lies at $41.17. Both extremes lie well within Western Digital’s support/resistance levels, and it may take more than just a beat or miss to break WDC out of its doldrums.

But that doesn’t mean that there aren’t trading opportunities to be had …

2 Trades for WDC Stock

Put Spread: From a contrarian perspective, a struggling stock with heavy bullish sentiment is a recipe for disaster. Shares of Western Digital have shown little life in the past year, yet analysts and short-term options traders appear to have high expectations (creating the opportunity for a sharper-than-expected selloff following a poor report). Those traders looking to buck the brokerage bunch and side with the bears might consider a May $40/$42.50 bear put spread. At last check, this spread was offered at 79 cents, or $79 per pair of contracts. Breakeven lies at $41.71, while a maximum profit of $1.71, or $171 per pair of contracts, is possible if WDC closes at or below $40 when May options expire.

Call Spread: On the other hand, if Western Digital can live up to expectations and dodge the guidance curse plaguing this earnings season, there is ample sideline money (i.e. a short squeeze) to send WDC stock sharply higher. Traders looking to follow the brokerage community’s lead might want to consider a May $45/$47.50 bull call spread. At last check, this spread was offered at $1.05, or $105 per pair of contracts. Breakeven lies at $46.05, while a maximum profit of $1.45, or $145 per pair of contracts, is possible if WDC closes at or above $47.50 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/wdc-stock-western-digital-options/.

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