A forecast-induced near-wipeout in Ambarella (NASDAQ:AMBA) following earnings may be setting up a sunnier long-term outlook. But if you’re looking for a more stable ride in AMBA stock, a bullish combined spread position with limited and reduced risk is one to consider. Let me explain.
Shares of video-processing chip specialist Ambarella tumbled this past Friday to a two-year low after topping views for Q2, but spooking Wall Street with weak sales guidance. AMBA finished off by 3.6%, but did manage to reverse the bulk of its near 13.5% intraday decline.
It hasn’t been easy, but the one-time growth darling infamously tied to GoPro (NASDAQ:GPRO) and its misfortunes has managed to decouple itself from its former largest customer. And while AMBA stock’s pivot away from consumer tech and into commercial auto and security markets has been challenging, it is showing results.
But now, AMBA stock is doubling down with its still-under-development computer vision (CV) technology. If the move works, the payoff should be big for Ambarella. But for investors predisposed to short-term results, the bet also means the only metric going up for AMBA stock right now are expenses, with a still uncertain future.
AMBA Stock Monthly Chart
As the monthly chart of AMBA stock attests, it has been a tough couple years for bulls, albeit with pockets of brief and favorable price volatility. But shares are now in a position to bottom and reverse that trend.
Friday’s finish has allowed AMBA to form a hammer or bullish-looking doji candlestick. The monthly price action has found support from the 76% retracement level and has, for all intents and purposes, revisited the 2016 low in a double-bottom pattern.
Looking forward, the expectation is for AMBA stock to hold the low and rally with eventually a full-fledged uptrend building during 2019.
Ambarella Bullish Combined Spread Strategy
If investors wish to gain some long exposure in AMBA stock, one interesting-looking strategy involves combining two spreads for stronger risk-adjusted returns. Specifically and with AMBA stock at $37.30, buying a modified Feb $42.50/$52.50/$60 call butterfly and selling the Feb $35/$32.50 put spread for a debit of 50 cents is attractive.
Risk with this combined spread is a function of both the debit and the put vertical. If shares of Ambarella are above $35 but below $42.50 at expiration, the trader is out a minimum of 50 cents. If the put spread goes in-the-money, the loss would build to $3 below $32.50. Still, the contained loss would have to break August’s bullish hammer low, which we’re optimistic will hold.
On the upside, if AMBA rallies into February expiration, this bullish trader maintains a profit zone above $43. That’s about 12% above the current market price. The sweet spot for this strategy is $52.50 which can capture as much as $9.50 in profit at expiration.
Lastly, unlike a regular butterfly, because this structure isn’t symmetrical if any further investor updates over the next several months resonate more strongly with Wall Street, this trader is guaranteed a profit of $1.50 above $60.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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.