by Joseph Hargett | April 11, 2014 10:47 am
Tech stocks have taken a beating on Wall Street during the past week, but those fortunes may be about to change as earnings season heats up. In fact, with strong earnings reports expected out of bellwethers Intel (INTC) and SanDisk (SNDK), the recent weakness in tech stocks may be a boon for savvy investors.
Today, we’ll take a closer look at Wall Street’s expectations and how to trade SanDisk and Intel stock ahead of earnings:
Semiconductor giant Intel has lost a step or two from when its Pentium processors ruled the desktop market. The company’s chips are still well-respected — INTC holds the No. 1 spot in the semiconductor industry at 15.4% market share — but demand for PCs and laptops has fallen quickly, replaced by growing consumer demand for mobile products like smartphones and tablets.
However, reports from IDC and Gartner suggest that the PC market is stabilizing, indicating that Intel earnings might surprise Wall Street when they’re reported at the close of trading on Tuesday, April 15.
For the record, the consensus is forecasting a profit of 37 cents per share of Intel stock, though EarningsWhisper.com indicates that the whisper number arrives a penny higher at 38 cents per share. Overall, expectations in the brokerage community are extremely muted, with Thomson/First Call reporting that only 14 of the 43 analysts covering INTC rate it a “buy.” What’s more, the consensus 12-month price target of $26 represents a discount to current prices around $26.50 — and this after several sessions of heavy selling pressure.
Options traders, meanwhile, have a rosier outlook for INTC stock — at least over the short term.
Specifically, INTC has attracted roughly 420,000 calls in the April/March series of options, compared to 326,000 puts. The result is a relatively neutral put/call open interest ratio of 0.78 for the front two months of options. (In other words, options traders are nearly divided on Intel stock’s prospects.)
Peak call open interest for INTC’s April/May series resides at the in-the-money April 18 $26 strike, with more than 86,000 contracts in residence. Following at a close second is the out-of-the-money April 18 $27 strike, which sports call open interest of 79,000 contracts. Peak put open interest, meanwhile totals about 76,000 contracts at the April 18 $26 strike.
Click to Enlarge Taking a closer look, we find that weekly April 18 implieds are pricing in a potential post earnings move of about 4.1% for Intel stock. This places the upper bound for a potential post-earnings move at $27.61, while the lower bound lies at $25.39. A rally to this upper limit would place INTC above resistance at $27 and within striking distance of fresh 52-week highs.
While the PC market has been tough, there are signs of a rebound. What’s more, Intel has been making inroads into mobile and cloud computing. As such, while first-quarter figures will likely arrive in line with expectations, Intel earnings guidance could surprise quite a few analysts and investors.
Options Trade for Intel Stock: Bull Call Spreads
Thus, traders looking to position themselves ahead of next week’s report might want to consider a May $26/$27.50 bull call spread.
At the close of trading on Thursday, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $26.65, while a maximum profit of 85 cents, or $85 per pair of contracts, is possible if Intel stock closes at or above $27.50 when May options expire.
Semiconductor and flash memory specialist SanDisk has been on fire for the past several quarters, releasing a series of blistering quarterly reports. In fact, SNDK saw revenue rise 28% and 12% in the third and fourth quarters of 2013, respectively.
The company clearly is firing on all cylinders, and its move toward a business solution model is paying off big.
SanDisk earnings will arrive after the close of trading on Wednesday, April 16. Wall Street is currently expecting a profit of $1.17 per share on revenue of $1.49 billion, compared with a profit of 68 cents per share on revenue of $1.34 billion in the year-ago period.
No whisper number is currently being offered for SanDisk earnings, but the brokerage community still appears quite bullish on the company’s prospects. For instance, data from Thomson/First Call reveals that SNDK stock has attracted 20 “buys,” seven “holds” and just three “sell” ratings. That said, there is room for improvement, with the 12-month consensus price target of $83 resting a mere 9% above SanDisk’s Thursday close.
Optimism toward SNDK stock doesn’t extend beyond Wall Street analysts, though. Short sellers are betting on a reversal for the stock, with some 18.9 million SNDK shares sold short. These shorted shares represent 8.45% of the stock’ total float and could provide ample fuel for a potential short-squeeze rally for SNDK stock.
Elsewhere, puts are extremely popular with short-term options traders. In fact, the April/May put/call open interest ratio for SNDK arrives at an elevated reading of 1.39. Additionally, most of SanDisk’s options activity is centered on the weekly April 18 series (i.e., options that expire the week of SanDisk’s earnings report).
Peak call open interest totals 3,924 contracts at the weekly April 18 $72.50 strike, with another 3,760 calls open at the $80 strike. On the put side, more than 4,200 contracts are open at the weekly April 18 $75 strike, with 3,079 puts open at the April 18 $70 strike.
Click to Enlarge Technically speaking, the recent selloff in the tech sector has SNDK stock perched on support at its 50-day moving average. The shares are facing resistance at $82.50, and $85 on an extended run higher. Support lies at $75, and at $70 should the current sell-off continue.
Traders looking to position themselves ahead of SanDisk earnings will want to know that weekly April 18 implieds are pricing in a potential post-earnings move of about 6.6%. This places the upper bound at $80.98, while the lower bound lies at $71.02.
2 Options Trades for SNDK Stock
With SNDK stock sitting on support near over-sold levels, and with the potential for a short-squeeze rally in the event of an earnings surprise, traders might want to consider a May $72.50/$77.50 bull call spread.
At last check, this spread was offered at $2.70, or $270 per pair of contracts. Breakeven lies at $75.20, while a maximum profit of $2.30, or $230, per pair of contracts, is possible if SNDK stock closes at or above $77.50 when May options expire.
Alternately, since premiums on SNDK May call options are not quite favorable at the moment, another strategy might be to open a May 70 put sell position — a strategy that plays off technical support for SNDK stock in the 70 region. The May 70 put was last bid at $1.90, or $190 per contract.
The upside to this put sell strategy is that you keep the premium as long as SNDK closes above $70 when May options expire. The downside is that should SNDK trade below $70 ahead of May options expiration, you could be assigned 100 shares for each contract sold at a cost of $70 per share.
While this outcome might not seem likely, it is always best to be aware of the potential risks ahead of time.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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