A great-sounding secular theme for NXP Semiconductors (NXPI) needs to be tempered as weaker-than-forecast guidance and a bearish technical outlook in NXPI take immediate precedent for investors.
But for bullish traders willing to buy NXP stock on weakness, I have a trade that’s worth considering now.
If you’re ready to be spellbound, look at this bullish write-up for NXPI stock which lays out the company’s near field communication technology. NFC technology is behind the company’s spectacular growth in the burgeoning Internet of Things, as well as driverless and connected automobiles.
NXPI’s chips are also are used in Apple (AAPL) devices and estimated to be in more than a billion mobile devices this year.
For a strategist that has already written optimistically about NXP Semiconductors’ bullish prospects, finding additional validation for NXP’s future growth prospects made me want to go right out and snap up shares of NXPI on Tuesday afternoon.
But the market has spoken recently and the near-term prospects don’t look terrific — at least not for a straight-up buy.
Last week, NXPI delivered a wake-up call: light sales for Q3 and a disappointing Q4 revenue outlook. NXP Semiconductors attributed the reduced guidance to a weaker-than-expected macro environment that’s making its end-customers cautious. Investors were more than a bit cautious as well as shares of NXPI tumbled nearly 20% in the immediate aftermath.
NXPI Stock Chart
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A double bottom is bullish, of course. Yet the bigger picture appears to take on the bearish persona of a “complex” head-and-shoulder pattern, which we see as trumping the smaller formation.
The technical interpretation is an irregular right shoulder in NXPI is now complete and currently toiling around a prior neckline that was breached and quickly reversed during August’s historic market swoon.
The same post-earnings price action in NXPI is trying to hold (loosely) a 62% Fibonacci level from last October’s corrective low. Combined with the bearish head-and-shoulders top, we’re inclined to see weaker prices in NXPI before a lasting bottom will be put in place.
NXPI Stock Bull Put Spread
As we expect lower prices, but want to ultimately buy shares of NXPI on weakness, let’s use an out-of-the-money bull put spread.
By selling an NXPI vertical below the market, the trader has the opportunity to collect income and/or pick up shares at a predefined price — and all the while, maintaining limited risk in case enthusiasm for buying on weakness changes in the future.
Reviewing the NXPI options board, the Dec $70/$65 bull put spread for a credit of 75 cents or better fits in with what’s been presented.
You will keep the 75-cent credit if shares remain above $70, which currently is 12% below NXPI’s price in the mid-$79s. Alternatively, if NXPI moves below the sold $70 strike, you can accept assignment and convert into a long stock position for $69.25.
Unlike with the sale of a naked put, the vertical acts as an effective risk management tool, as the trader has a guaranteed stop-loss of sorts at the purchased $65 strike in NXPI.
Thus, even if NXPI were to go to zero during the life of the spread, the most this trader would lose is $4.25 per spread.
Of course, a trader could wait for a turn lower in NXPI before entering into this spread and look to get a better entry price. But given the sometimes fickle nature of bears, buying NXPI this way has rarely looked better.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. 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. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
