NetApp Inc. (NASDAQ:NTAP) had already triggered a weekly short trade coming into earnings this week, so this outcome is adding to the bull woes. But when the selling is heavy the put premiums are juiciest, and therein lies my opportunity today.
I want to sell risk into what others fear. But usually I do this in companies where I have tangible value. NTAP is not a clearly cheap stock, but with a 21 price-to-earnings ratio it’s not bloated either, so owning shares at a deep discount from today’s prices will not be a major financial debacle.
This morning’s negative reaction to the earnings headline is one of disappointment. Even though management beat expectations, they failed to wow investors with their forward guidance. This too shall pass. I want to go long strong results.
From a technical level, this 5% dip brings it to a pivot level that has been in contention all year. In March and after two failed tries, the bulls finally broke out from $64 per share to mount a 12% rally. Unfortunately coming into the earnings event they had already priced most of it out.
Pivot zone like that usually become support on the way down. But this is the first red candle on earning so this might not be a perfect bottom. But since I use options, I can leave enough room for error so I don’t have to be surgical with my entry and exit points. This is especially important during headline trading times like these. In addition to the stock fundamentals, I have to worry about China tariff war tweets. Homework is still hostage to headlines
Luckily, year-to-date it was still up 20% keeping pace with high-fliers like Salesforce.com, Inc. (NYSE:CRM). It definitely out-paces others more expensive stocks in the industry like Juniper Networks, Inc. (NYSE:JNPR). So NTAP could be the diamond in the rough.
Click to Enlarge NTAP is a momentum stock that tends to run fast and long on breakouts in either direction. This is another reason I prefer to use options for it. Otherwise, they look like they are falling into an abyss, making them impossible to catch on days like today.
Technology companies like NTAP have greener pastures ahead. We now live in a world that is completely dependent on tech. This is the age where everything is in the cloud. So storage needs will continue to ramp at an exponential rate. NTAP is one of few providers to that, so they will have the opportunity to benefit for years to come.
NTAP Stock Trade Ideas
The Trade: Sell the NTAP Aug $55 naked put. This is a bullish trade where I collect 90 cents per contract to open. Here I have a 82% theoretical chance of success. But if price falls below my strike then I accrue losses below $54.10.
Selling naked puts carries big risk especially for a momentum stock like NTAP. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the NTAP Aug $55/$50 bull put spread where I have the same odds of winning. Then the spread would yield 15% on risk.
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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.