It appears that a good foundation along with promising market news will slowly propel Applied Materials (AMAT) into a bullish pattern this year. With the beginning of this growth, long-term stock investment and short-term option strategies offer income producing opportunities for the savvy investor. We have an example of a type of option strategy to implement here as Applied Materials starts to claw its way up.
Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide. The company's Silicon Systems Group segment offers a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. This segment provides systems that perform primary processes used in chip fabrication, including atomic layer deposition, chemical vapor deposition, physical vapor deposition, electrochemical deposition, rapid thermal processing, chemical mechanical planarization, wet cleaning, and wafer metrology and inspection, as well as systems that etch or inspect circuit patterns on masks used in the photolithography process.
2011 was a hard year for many companies and AMAT was one of them, but since then it looks like it has built a strong foundation at about 10.25 and is beginning to slowly move up in what is going to be a bullish peak and valley pattern just in the beginning stages. It has peaked and is now on its way down again but we believe AMAT has a lot to be bullish about. Here are some reasons:
- North American chip equipment makers posted a bill to ration of .95. Orders still trail sales, but this shows great improvement from December, when it was at .85 and it is having a positive impact upon companies like AMAT.
- As chipmakers begin to stock up on products, AMAT has raised its current forecasts for the quarter.
- RBC Capital Markets recently upgraded it to "outperform" the sector. (Yahoo Financial)
- With a good foundation build and the industry apparently turning, we are going to be bullish this year on AMAT and see a good opportunity for option trading.
(Click chart to enlarge)
As AMAT begins to build its formation, we are expecting to see deep swings from peak to valley. In this formation, we are expecting higher highs and lows. Presently the stock has peaked and is on its way down. We like the first play to be a Bear Put Spread.
- Buy a July 2012 '12' Put Option (presently priced at $0.75)
- Sell a July 2012 '13' Put Option (presently priced at $0.40)
- Net Starting Debit $0.35
- Max Profit $0.65
Reasoning behind the Trade
We are long-term bullish on AMAT as we see its industry growing in 2012 but we do not see a straight bullish move up. We foresee a bullish peak and valley formation as it rises this year. This gives us the opportunity to make money with short-term option trades while the stock moves. Since we have just peaked, we are looking at a downward move.