Coming into its earnings report, Seagate Technology PLC (NASDAQ:STX) stock had not had a good year so far. What made things worse is that the markets in general have never been more bullish. Even more specifically, while the PHLX Semiconductor Index is up 35%, STX was down nearly 9% through Friday.
So, in this uber-bullish equity market it’s hard to find stocks that are this down on their luck. And when we do, it’s an important sign to heed.
Nevertheless, today I want to add more bullish risk in STX stock.
On previous dips, I sold downside risk which are now complete wins. Now I can reload with more of the same but on different levels and time frames. The idea is to bet on support levels and not chase upside hopium especially now that’s the stock is off to the running.
I could buy the shares and hope for price to continue its trek higher. But I am a conservative trader so I need assurances. Trading options gives me the leeway to build sizable buffers. With room for error, I can have more conviction in my thesis.
This positive reaction to earnings coincided with a bullish technical set up. Coming into it, STX stock was technically frisky. It was breaking out of resistance area around $34.4 per share. With this move higher bulls can now fill the open gap left by the opposite reaction on its last earnings report.
$40 per share could be resistance to STX. It’s been an area of contention and these tend to cause some buyer exhaustion. This is another reason why I will not chase it. I have more faith in the support than the upside potential. Think of it as a contingency buffer zone in case price goes against my trade.
From a valuation metric perspective, Seagate stock is a screaming bargain. But when things are this cheap I question why. There were headlines all year which caused severe dips in it so caution is warranted. But at 13 price to earnings it’s worth a shot for a bullish trade.
Click to Enlarge Expectations are terrible for STX stock. Analysts who cover it don’t expect much of it. As a result, the stock it is now trading below the average price target on Wall Street and closer to the lowest target than the highest of expectations. Now that it’s moving higher these experts are likely to reiterate or raise their targets.
Those headlines if they come would cause another wave of buying.
In my style of trading I won’t need Seagate to rally to profit. I merely need prices to not fall apart to win.
Seagate Stock Trade Idea
The Trade: Sell the STX Mar 2018 $30 put and collect $1.10 per contract to open. This is a bullish trade that has an 85% theoretical chance of success. But if the price falls below my strike then I own the shares and would accrue losses below $28.90.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the Mar 2018 STX $30/$28 credit put spread where I have about the same odds of winning. If so then the spread delivers more than 20% in yield on risk and I don’t even need a rally to profit.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.