Pacific Crest just took the wind out of Ambarella Inc’s (NASDAQ:AMBA) sails. At least in the short run. The hot semiconductor stock is down nearly 7% on Tuesday after the firm downgraded AMBA stock from “Overweight” to “Sector Weight.”
Before today’s stealth strike, Ambarella shares were up 31% over the past six weeks. The rise re-established the bulls’ foothold by carrying the stock back above all its major moving averages. Today’s plunge, however, has AMBA retesting its 20-day moving average.
Watch closely in the coming days to see if buyers step up to defend their turf.
Of course, volatility isn’t a new phenomenon for Ambarella. It has been a mover and a shaker ever since bursting onto the public scene in late 2012, lifted by the potential seen in major client GoPro Inc (NASDAQ:GPRO). Momentum lovers have long since added AMBA to their watchlist.
With earnings looming next Tuesday, there isn’t much time to capitalize on today’s down-gap if you’re unwilling to hold your position into a binary event. For those willing to participate in the quarterly ritual, read on for a few ideas.
Option premiums find themselves in the midst of the typical pre-earnings volatility ramp. At 55%, AMBA’s implied volatility rank is officially high, making option contracts ripe for the selling.
How to Trade AMBA Stock
If you’re willing to bet today’s plunge is a buying opportunity — and, if you’re ready to lean bullish into next week’s earnings release — then sell the Jul $55/$50 bull put spread for 90 cents or better.
The spread is positioned to deliver the max reward of 90 cents if the stock sits above $55 at expiration. Obviously, an up gap following earnings would be ideal, but as long as the stock simply doesn’t gap down too much, you will profit.
The max risk is limited to the spread width minus the net credit, or $4.10, and will be forfeited if AMBA stock falls below $50 by expiration.
In timing the entry, I suggest waiting for signs the stock is finding support. If Ambarella continues plumbing the depths for the rest of the day, then wait.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.