3D Systems Corporation (NYSE:DDD) suffered eight straight days of selling that saw DDD stock fall 25%. But finally, the 3D printing leader appears to have found footing at the $14 level.
Given the recent price action and call activity, the bulls can at least rest here. DDD shares should hold support over the coming weeks.
It wasn’t too long ago that 3D Systems, along with fellow 3D printing competitor Stratasys, Ltd. (NASDAQ:SSYS), were the darlings of the momentum investing crowd. After reaching an all-time of $96.43 in early January 2014, however, DDD has dropped 85%. While the exuberance was overdone at those previous lofty levels, I think the pessimism may now be reaching overdone status as well.
DDD Stock Charts
From a technical standpoint, DDD finally is showing signs of a bottoming formation. The 9-day RSI reading of 21 shows just how deeply oversold shares have become. The last time 3D Systems was this oversold was back in late April, which also marked a short-term low.
Also, $14 is major support for DDD, and shares briefly pierced that level Monday … only to pivot and head higher. Monday also saw huge and unusual call volume, which many times indicates that the big boys are positioning for a move. Nearly 20,000 contracts of the Oct $13 and $13.50 calls traded versus open interest of only 7. The 20,000 contracts control 2 million shares of DDD stock. These are the traditional monthly options that expire this Friday, so the big-time buyers are looking for something soon.
This unusual option activity also drove the option implied volatility (IV) dramatically higher, with IV in DDD now at the highest levels of the year. High levels of IV are a good contrarian indicator and many times signal a low in the price of the underlying, as it did the last time 3D Systems stock bottomed.
One of the main drivers of the recent carnage in DDD stock was a bearish note on Oct. 13 from Piper Jaffray analyst Troy Jensen, in which he hinted that both DDD and SSYS were likely to miss revenue numbers when they report earnings early next month. On a more bullish note, he goes on to say that he expects earnings to be unaffected due to cost cutting.
3D Systems also is valued at just $1.6 billion, so merger and takeover chatter has also heightened recently.
How to Trade 3D Systems
Considering that DDD stock looks like it may have staunched the bleeding technically, and considering the big-time call buying, I like a short-term put credit spread to position bullishly along with the call buyers while taking advantage of heightened option premium.
Buy the Oct $12 puts and sell Oct $13 puts for 15 cents net credit.
These options expire Oct. 28, before earnings on Nov. 3. Maximum gain is $15 per spread and maximum risk is $85 per spread. Return on risk is 17.64%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
