Applied Materials, Inc. (NASDAQ:AMAT) threw a wrench into the semiconductor sector’s breakout rally last week. Let me rephrase that … sky-high expectations and inflated stock valuations threw a wrench into the semiconductor sector last week.
For all intents and purposes, Applied Materials posted impressive second-quarter earnings and issued better-than-expected third-quarter guidance. Instead, AMAT stock was pounded for weak guidance in its display unit. Applied forecast 7% growth for display revenue, half what Wall Street was expecting.
Click to Enlarge It was another beat-and-raise quarterly report that was met with heavy selling pressure on Wall Street. “Sell on the news” appears to be the new normal in this market.
Fortunately for AMAT stock investors, there is still strength in the semiconductor sector. The pivot point I warned about back in April has broken to the upside for the sector as a whole. That’s not to say there won’t be choppy days like Friday to deal with, but the overall uptrend remains intact.
This should hold true for AMAT stock as well. The shares dipped below support at $50 and their 200-day moving average on Friday, but AMAT is recovering this morning. The stock should reclaim $50 in today’s trading, and resume its former uptrend as investors focus on Applied Material’s longer-term prospects.
As for the AMAT sentiment backdrop, analysts were not shaken by the lowered guidance for display revenue. Thomson/First Call still reports that 20 of the 21 analysts following the shares rate them a “buy” or better. The consensus 12-month price target still rests at $70.14.
AMAT stock options traders have shifted sharply from their pre-earnings love fest. Currently, the June put/call open interest ratio rests at 1.02, up significantly from the May reading of 0.57. That said, peak put OI lies at the deep out-of-the-money $40 strike, hinting that premium selling may be driving activity.
Overall, June implieds are pricing in a potential move of about 6.75% for AMAT stock. This places the upper bound near $53.40 and the lower bound near $46.60.
2 Trades for AMAT Stock
Call Spread: With the knee-jerk reaction out of the way, AMAT stock should recover nicely from it’s earnings selloff. Traders looking to profit from bounce might want to consider a June $52.50/$55 bull call spread. At last check, this spread was offered at 46 cents, or $46 per pair of contracts. Breakeven lies at $52.96, while a maximum profit of $2.04, or $204 per pair of contracts — a potential 580% return — is possible if AMAT stock closes at or above $55 when June options expire.
Put Sell: On the other hand, AMAT stock could enter a sideways trading pattern before finally breaking out to the upside. For those looking for a more cautious approach, a June $45 put sell is a viable alternative.
At last check, this put was bid at 20 cents, or $20 per contract. If AMAT stock trades above $45 through expiration, traders entering this position will retain the premium received. However, if AMAT stock trades below $45 ahead of expiration, then traders may be assigned 100 shares at a price of $45 per share for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.