Go Long NetApp Inc. (NTAP) Stock With Confidence

Fundamentally, it’s hard to compare NetApp Inc. (NASDAQ:NTAP) and its competition, but I can say that it’s not cheap from a price-to-earnings perspective. Gross margins are decent, but the P&L eats the profits up to the bone before it reaches the net level. So profitability is less than ideal.

Go Long NetApp Inc. (NTAP) Stock With ConfidenceLuckily expectations are humble. Most analysts rate it a hold, so if there were to be a rating-change headline it’s likely to be an upgrade surprise not a downgrade.

Furthermore, NetApp offers a dividend with about a 1.9% yield. This is important because equity markets are at all-time highs, so we are open to dips. Stocks that offer dividends usually hold up better in market-wide corrections than those who don’t.

Technically, the 12-month daily chart shows recent stability, which usually indicates consolidation ahead of another move higher.

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But when I zoom out to a weekly chart I see big downside potential. So any bullish setup needs to make room for error especially that earnings are coming tonight.

If I buy the stock at $40 now, my money is at risk immediately and with no buffer. So I will use the options instead, where I can structure risk that allows a margin of error appropriate to the potential technical risks.

The thesis today is that NTAP stock will hold above $35 per share for the next few months … and if it doesn’t, I am ready to buy it at a discount.

NTAP Stock Trade Idea

The Bet: Sell the Aug $34 NTAP put for $1 per contract. With this, I have an 80% theoretical certainty that I will retain maximum gains. Otherwise, I will own the stock and accrue losses below $33 per share. Since management will report tonight, I would sacrifice a few pennies buying protection for the next two weeks just in case.

I usually like to balance my trades by selling opposing risk but in this case I will delay this step for at least a week to see how this side performs.

Selling naked puts is a daunting task for many. For those people, I can turn this bet into a bull put spread instead.

The Alternate: Sell the Aug NTAP $35/$34 credit put spread. With this, I have a slightly smaller theoretical chance of success but with more limited risk. The cost of the compromise is not severe since I can still yield 14% on risk. Compare this with risking $40 per share then hope that the stock rallies 14% just to match the performance of the spread.

Selling options is risk business, so I only risk what I can afford to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Article printed from InvestorPlace Media, https://investorplace.com/2017/05/netapp-inc-ntap-stock-confidence/.

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