Chip stocks are on a rampage. The buying binge just drove the Vaneck Vectors Semiconductor ETF (NYSEARCA:SMH) to a new all-time high. And that has top holdings like Applied Materials, Inc. (NASDAQ:AMAT) ripe for bullish trades. Indeed, AMAT stock is flashing a high-quality breakout pattern right now.
Ever since the early February crash, tech stocks have been market leaders. The Nasdaq was the first broad market index to reclaim its peak and strength from semiconductors was a big reason for the muscle flexing. As shown below, SMH is ascending above rising 200-day, 50-day and 20-day moving averages.
Today the fund is eclipsing yesterday’s high, officially notching a new record.
Breakouts to new highs are always bullish events signaling to buyers one and all to come and bask in the profits.
Meanwhile, AMAT shares have been following in kind. Their recovery from February was rapid, resulting in a “V” shaped bounce for the ages. Volume patterns accompanying the rebound were particularly telling. Multiple accumulation days cropped up showing institutions were plowing capital back into the stock. Yesterday’s high volume ramp was merely the latest turn of this bullish saga.
Today’s mild pullback in AMAT is likely a buying opportunity. Here’s how to bank on further upside.
The Applied Materials Stock Trade
Recent market excitement has kept implied volatility for Applied Materials stock options elevated. To capitalize, we suggest deploying bull put spreads. Sell the Apr $57.50 put while buying the Apr $52.50 put for a net credit of $1.30. This creates a position that will deliver $130 of profit per spread if the stock sits above $57.50 at expiration. The initial cost (and risk) is capped at $370 per spread.
To incur the max loss, AMAT would have to fall below $52.50, and you would have to ride all the way to expiration. To avoid such a nasty fate, consider exiting if the stock breaches the 50-day moving average at $54.30.
As of this writing, Tyler Craig didn’t hold positions on any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.