AMAT Analysis

The manufacturer of semiconductors and other computing components Applied Materials Inc. (AMAT), headquartered in Santa Clara, California, publishes earnings on Thursday after the closing bell.

[AMAT in Wikipedia]

Update 12/30/2016: AMAT rose after earnings were published and remained well above its entry point when I exited for a profit. The gain in the value of the options position came from a sharp decline in implied volatility combined with the working of time decay in my favor.

Shares rose by 5.4% over 43 days, or a +45% annual rate. The options position produced a +94.1% yield on debit for a +799% annual rate


AMAT

I shall use the JAN series of options, which trades for the last time 64 days hence, on Jan. 20.

Ranges

Implied volatility stands at 39%, which is three times the VIX, a measure of volatility of the S&P 500 index. AMAT’s volatility stands in the 59th percentile of its annual range. The price used for analysis was $30.36.

Ranges implied by options and earnings

Week SD1 68.2% SD2 95% Earns
Upper 35.35 40.33 32.05
Lower 25.37 20.39 28.88
Gain/loss ±$4.99 ±$9.97 ±$1.59

Implied volatility 1 and 2 standard deviations; central tendency earns moveThe Trade

After more than a decade of price stagnation following the crash of the Dot-com Bubble in 2000, AMAT in 2013 began a climb to a post crash high that so far has peaked on Sept. 21 and then entered a period of correction.

In Elliott wave terms, it is now in the second wave — and upward movement — of a Flat. It remains below the September peak. The correction covers a range from $28 to $31.

Zacks Investment Research gives AMAT a bullish rating but with no indication of a looming earnings surprise.

Brokerages on balance give AMAT a 61% enthusiasm rating, with 78% of 18 analysts issuing strong buy recommendations.

AMAT’s price has risen immediately after all of the last four earnings announcements.

Based on the sideways chart pattern and the lack of an earnings surprise indicator, I shall attempt a direction neutral structure, expanding the profit zone to the upside as possible.

Iron condor, short the $34 calls and long the $35 calls,
short the $28 puts and long the $27 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money

JAN Strike OTM
Upper 34 83.2%
Lower 28 70.1%

The premium is $0.33, which is 33% of the width of the position’s wings.

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a $3 move either way. The biggest immediate move after each of the past four earnings announcements was $2.94, and the average was $1.71. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.59.

Decision for My Account

I have entered a position on AMAT as described above. The stock at the time of entry was priced at $30.59.

By Tim Bovee, Portland, Oregon, Nov. 17, 2016

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