A nasty forecast turned into a wipe-out in Ambarella Inc (NASDAQ:AMBA) shares. But is AMBA stock really in trouble, or is this simply a case of investors taking a sell-the-news reaction to an extreme? Let’s take a quick look off and on the price chart and offer a limited-risk opportunity that fits situation.
No doubt about it, Friday’s price plunge in AMBA was worthy of pulling out a GoPro Inc (NASDAQ:GPRO) camera to capture the moment. Shares of the high-definition, video chip manufacturer finished down more than 22% and enough to hit a new low for 2017.
Behind the bruising tumble, Ambarella investors turned their attention past an earnings and sales beat and reacted to management’s surprise lower guidance.
Much to bulls chagrin, the post-earnings call featured Ambarella warning investors to expect “a substantial decline” in its GoPro business. As well, the company acknowledged needing to make allowances for a weaker-than-expected high-end drone market which AMBA serves and the company’s virtual reality market — and one that has also come up short of forecasts.
If it all sounds and looks pretty, bloody awful, it’s probably because it is. But amid the carnage and at least a couple downgrades, investment bank Morgan Stanley defended its overweight rating.
The firm’s support for Ambarella is based on its “machine vision” chips, which they’re hopeful will add substantial perceived strategic value into AMBA stock beginning later this year.
AMBA Monthly Chart
Looking at the monthly chart of AMBA stock, Friday’s wreck looks a bit less disastrous. To be frank though, technically I don’t think the worst is over either.
Near-term, the expectation is shares of Ambarella will likely bounce. That of course wouldn’t be a surprise given the extreme reaction on Friday. More importantly, with AMBA failing to hold its loose testing of the 62% level, a challenge of 2016’s low and 76% support, appears very likely in our estimation.
If a retest was to occur, a double-bottom near $33.50 could ultimately form and serve to take AMBA stock higher. Thus, for investors who are still bullish on Ambarella, I’d suggest waiting — or maybe better yet, turn to the options market for positioning today.
AMBA “Bear-to-Bull” Put Strategy
Reviewing the AMBA options board, one strategy that’s appealing given our view is modified long put butterfly strategy. Specifically and with shares at $42.21, the Nov $40/$35/$32.50 put combination for $1.10 is favored.
What does this limited-risk spread offer AMBA traders? For starters, it is unequivocally bearish. Above $40 at expiration and the debit will be lost. More optimistically, in a willful kind of way, if shares continue lower and put together a test of the 2016 lows, there’s the potential for a max payout of $3.90 at expiration if AMBA landed right at $35.
While obviously the trader has profiteered as a bear, a profit in excess of 10% of AMBA stock would certainly make for a nice cushion if the trader was inclined to buy shares in anticipation of technical low holding. That’s the “bull” part of the strategy if it comes into play.
Another benefit is if Ambarella dropped significantly lower below the $32.50 strike, the trader is able to retain a profit.
With the embedded and profitable bear put spread twice as wide as the bullish vertical, the trader is left with a guaranteed $1.40 regardless of how low AMBA may go. Thus, while there would be less of a profit and a double-bottom could be long broken at that point, the bull part of the strategy may be even more demanding of a trader’s consideration.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!