If the trend is said to be your friend, look no further than shares of Sandisk (SNDK) stock and a limited risk, long put strategy to profit from lower prices moving forward.
Late last week, Goldman Sachs removed SanDisk stock from its “Americas Buy List” and simultaneously downgraded from to “neutral” from “buy.”
The firm cut SanDisk stock based on growing evidence of a weaker NAND environment, loss of SSD market share, company specific manufacturing issues and declining demand for mobile phone add-on card slots.
As the cautious move comes after shares of SanDisk stock were put on Goldman’s Conviction Buy list some 40% higher back in November of last year, what would a “sell” take?
Sandisk Stock Weekly Chart
Click to Enlarge
The technical observation that SNDK is readying to continue its trend to fresh lows is two-fold and perhaps, over time, will find SanDisk stock challenging the mid-$30s, last seen back in 2012.
First, we can see at “D” a Fibonacci-based “mirror move” (where leg AB = leg CD) was completed near $55 a share of SanDisk stock.
The completion of SanDisk stock’s mirror move also lined up fairly well with 50% Fibonacci support based on a cycle low just over $5 in SNDK back in 2008 to a cycle high approaching $109 in mid-2014.
The problem for SanDisk stock bulls at this juncture and why bears have the upper hand is this key support level already broke once during the Aug. 24 mini-flash crash. Now a second breach as of Friday’s close looks to confirm the existing downtrend is ready to resume its path lower.
Reinforcing the bear case, aside from a warning from our Fibonacci evidence, bulls have failed to maintain SNDK’s pivotal highs from 2011 and 2012 indicated by the black horizontal line.
SanDisk Long Bear Put Strategy
Click to Enlarge
At the recent low of $44.28 in SanDisk stock, the paid premium of $3.10 would be pure stock or intrinsic value, while the contract itself is estimated to be worth approximately $6.75 if the move occurred sometime in the next couple weeks and implied pricing remained static.
Even better, we can reasonably anticipate that if shares of SanDisk stock were to stage a retest of the late August lows, implieds would likely move up and improve the long put’s value for the trader.
On the downside (if SNDK rallies), the position can’t lose more than the debit initially paid. Compared to bears that simply short stock, that’s a very large benefit of using a long put position.
Future time decay risk and the lower implied pricing in SanDisk stock’s options are potential hazards, but in our view are more easily managed in most situations than short stock risk.
Regarding the put position risk, we’d look to set a 50% money (contract) stop. Initially, this kind of money management should work out to exiting shares of SanDisk stock in a price range that’s slightly above the 50-day simple moving average resistance to roughly last week’s highs of $57.14.
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. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
