A trade war on and off the chart may just be beginning in Acacia Communications (NASDAQ:ACIA). But following a scud-like bombshell, bear put spread traders have the strategic advantage in Acacia stock moving forward. Let me explain.
Shares of optical device and cloud communications provider Acacia Communications imploded Monday on the heels of a surprise ban by U.S. authorities to ZTE Corp. The announced move strikes disastrous consequences for ACIA shares which tumbled 36% to finish at a new all-time closing low.
According to Reuters, the Chinese telecom equipment manufacturer failed to comply with an agreement laid out in a U.S. sanctions violation case involving illegal sales to Iran. In retaliation, the U.S. Department of commerce stated American companies will not be allowed to sell their products to ZTE for seven years. So how does that affect Acacia stock?
Monday’s punishing reaction from Wall Street is due to Acacia’s unusually heavy dependence on ZTE Corp. With a very concentrated 30% of its revenues tied to the manufacturer, what has been a tough couple years for the recent and short-lived IPO darling has just gotten a good deal worse.
Adding salt to ACIA’s current wounds, with the U.S. and Chinese governments moving towards a full-blown trade war, another blow to Acacia stock could be forthcoming, with China responsible for about 40% of the company’s revenues the past couple years.
Bottom line, top line and even when looking at the linear battle line drawn on the ACIA stock price chart, investors have better reasons to retreat than defend shares off and on the price chart.
Acacia Stock Weekly Chart
Monday’s scud-like bomb courtesy of ZTE has put Acacia stock into a quick testing position of its all-time-low formed as shares debuted in 2016. Technically the price action sets up a potential double-bottom. But if it wasn’t made clear above, it’s a battle line this strategist expects will break to the downside and not a spot for bulls to defend ACIA.
Acacia Stock Long Bear Put Spread
Reviewing the ACIA options board and given what’s been addressed on and off the price chart, the May $25/$22.50 bear put spread is a favored combination which allows for reduced and limited-risk positioning.
With Acacia stock at $25.62, the near-the-money bearish vertical is priced for $1.10. The cost limits a trader’s exposure to roughly 4% of the risk associated with shorting shares. As well, compared to simply buying the $25 strike put, the cost is cut by more than 50%. And if shares fall below $22.50, there’s $1.40 in profit to be captured at expiration.
Nice, right?
The one downside to this spread, if there is downside to be had in Acacia stock, is the vertical won’t profit as quickly as an outright put purchase would. However, given the high premiums and the May contract only a month out from expiration; this bearish spread combination is more than a reasonable compromise on a risk-adjusted basis in our view.
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.
