3D Systems Corporation (NYSE:DDD) reported earnings last night and the immediate reaction was a +9% rip in DDD stock. So obviously management delivered what Wall Street wanted to hear.
I am a big fan of the concept of 3-D printing, but so far I am not a fan of the stock. I’m willing to bet that most households in the U.S. will have a 3-D printer of sorts in the next 10 years. It just makes sense to buy blueprints and print products for immediate delivery. Not every industry will be conducive to doing that, but I see uses for it right now in my current life.
Eventually, there will be a few mega-cap companies that will dominate the industry. Until then, stocks like DDD will fluctuate in price until they become profitable or until they get bought out. So in today’s trade, I will focus on the price range in order to participate in the longer-term bullish thesis of the industry more so than fundamentals.
I consider this a speculative trade inside a conservative portfolio. Luckily, DDD stock trades at a reasonable price-to-book ratio, so I am confident that I can own shares at a discount and manage them to profits in the mid- to longer-term.
How to Trade DDD Stock Today
Technically the lifetime chart of DDD stock is ridiculous. The highs in 2014 were above $90-per-share. After today’s move, it’ll be just over $13. So for this purpose, I will consider the daily chart, which shows some upside potential, even after this move.
If DDD stock bulls can hold above the $13-per-share, they could use it as a neckline for a bullish pattern that targets $15. And therein lies my opportunity.
No, I will not buy the shares outright and hope for a rally. In this high CBOE Volatility Index (INDEXCBOE:VIX) market, I prefer to sell risk into support to generate income. If the rally comes, then I profit faster. But if it doesn’t come, I can still retain my maximum gains if my support holds. Worst case scenario means that I will own shares at a discount and have to manage out of them without damage.
Even though I see upside potential, there is likely to be some resistance at $14- and $14.5-per-share. On the way down, DDD stock saw significant action around those levels so it would make sense that on the way up they would be somewhat difficult to overcome but not impossible.
Since I structured today’s trade more so based on price action and market expectations than solid financial metrics, I used DDD options. This way, I participate in the upside potential and leave room for error. Chasing the shares after a big spike leaves no wiggle room.
The Trade: Sell DDD AUG $9 put and collect 75-cents-per-contract to open. I have a 75% theoretical certainty, so that I retain maximum gains. Otherwise, I will accumulate losses below $8.25.
Selling naked puts carries big risk especially for a stock as frothy as DDD. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the DDD AUG $9/$8 bull put spread, which has about the same odds of winning and would yield 20% on risk. Compare this with risking $13-per-share here and without any room for error expect a rally profit.
Ultimately, 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.
