Investors are free to choose to see the silver lining in Applied Optoelectronics Inc (NASDAQ:AAOI). But off and on the Applied Optoelectronics stock chart, it’s a slippery slope and one tilted heavily towards shorting shares with a bear put spread.
Let’s just say management at AAOI has proven itself to be consistent. Now for the bad news: The dependability I’m referring to is the company’s ability to be completely unreliable towards investors.
The latest misstep and behind Thursday’s dizzying plunge in Applied Optoelectronics stock is last night’s woeful retraction and slashing of Q1 guidance well below prior forecasts and Street estimates.
There’s a saying: fool me once, fool me twice, but not three times. In this strategist’s view, this wholly applies to AAOI stock. I’d go on to say unless there’s a shake-up of management, investors thinking Applied Optoelectronics is worthy of a contrarian-style purchase, should beware.
Need I say more?
It’s true, the devil is in the details. But those particulars have already been well-documented and honestly don’t need to be rehashed here. Personally, I’d rather focus on the other big picture — a very supportive and slippery-looking slope on the AAOI stock chart and how to play it for less risk than shorting shares.
Applied Optoelectronics Stock Weekly Chart
To say Applied Optoelectronics stock has been hammered since hitting a high north of $103 just seven months ago, is not going to get an argument to the contrary from this strategist. But I’m also inclined to believe a very unfriendly trend for AAOI stock bulls is finished.
Thursday’s price move below the prior all-time-high of $28.01 and through the 76% Fibonacci support level are interpreted as signs Applied Optoelectronics’ bearish momentum will continue. I’d also estimate, lower prices won’t occur without volatility aided and abetted by AAOI’s heavy bear population — and reason for like-minded traders seeing more downside to come, to consider using the options market to their advantage.
AAOI Stock Bear Put Spread
The last time I wrote about Applied Optoelectronics stock was in early November. I stressed the company’s management issues over good-looking bottoming price action in shares. As much and for those still wanting to ante up with a contrarian bet, an out-of-the-money bull call spread for $1.00 or roughly 2% of the risk associated with AAOI stock was detailed.
The reduced and limited risk call combination never saw the light of day, but certainly served its purpose of minimizing an investor’s loss despite the continued fallout in AAOI shares.
In reviewing Applied Optoelectronics options in the aftermath of Wednesday night’s report, I’d once more turn to the vertical market for guidance and a similar appreciation for risk relative to return. This time, however, I’d use a bear put to capture potential profits based on a lower share price in AAOI stock.
One combination that looks attractive is the April $25 / $22.50 bear put spread for 75 cents with shares changing hands at $27.50.
If what’s viewed as a very slippery slope for AAOI stock continues over the next couple months, a max payout of $1.75 or 233% is possible below $22.50. And if bygones somehow finally manage to become bygones due to a catalyst like an upheaval of management, the 2.75% at risk will seem like a gift rather than a lesson learned the hard way.
Disclosure: 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 and StockTwits.
