Exiting one position and adding a layered strategy for another
Key Points from this Alert:
- We are issuing a sell on the Applied Materials (AMAT) October 20, 2017, 50 calls (AMAT171215C01000000) that gapped up yesterday to close at 0.89 vs. our initial buy-in at 0.46.
- We will use a portion of these proceeds to add a layered call strategy for Walmart by adding the Walmart (WMT) Jan 2018 80.000 calls (WMT180119C00080000) that closed last night at 2.68 with a Buy rating to the Tematica Options+ Select List. Our recommended stop loss for this new call position is 1.80.
- We continue to have a Buy rating on the Wal-Mart (WMT) January 19, 2018, 82.50 calls (WMT180119C00082500) that dipped modestly week over week.
- Spilling over from the move in the Applied calls, the Corning (GLW) November 17, 2017, $31 calls (GLW171117C00031000) rebounded as well to close at 0.55. We continue to rate this GLW calls a Buy ahead of the Apple (AAPL) iPhone X launch and more data on the reception of the iPhone 8 models in the coming days.
Booking a win as AMAT calls gap up and Wall Street catches up
Yesterday was a big day. While you may be thinking about the headlines surrounding the revealed GOP tax plan, I’m talking about the very upbeat 2017 Analyst Day held by Applied Materials (AMAT). I expected the company to deliver a bullish take on the health of its end markets, but candidly it was even stronger than expected as the company guided its 2020 earnings to $5.08 per share, and announced a new $3 billion share repurchase program.
As we always say here at Tematica, context is key and that 2020 EPS of $5.08 compares to consensus EPS of $3.20 this year and $3.60 next year. Continuing the context, adding the new $3 billion buyback program to the mix brings the total outstanding buyback to roughly $4 billion. At current levels, the company could buy up to 81.6 million shares, roughly 7.5% of the total outstanding share count.
As one might suspect, the underlying strength of this outlook lies in robust chip demand, not only smartphones, but the Internet of Things applications, big data and artificial intelligence (A.I.) that are part of our Connected Society and Disruptive Technology investing themes. We see yesterday announcements from AMAT as confirming the robust demand prospects that led to our first adding the shares to the Tematica Investing Select List and then the calls here at Tematica Options+.
With a few weeks remaining with these calls, and full well knowing the October strike date falls during the thick of 3Q 2017 earnings season, we’ll be prudent investors. That means using this week’s quick gains to our advantage and exiting the AMAT call position and book a nice gain of over 100 percent.
- With the likelihood that Wall Street will raise its outlook for Applied this morning, we will wait until 10:15 AM ET to exit the Applied Materials (AMAT) October 20, 2017, 50 calls (AMAT171215C01000000) that gapped up yesterday to close at 0.89 vs. our initial buy-in at 0.46.
- This delay should allow up to capture any incremental benefit to be had when the calls open up this morning.
The Spillover from AMAT Hits Corning
We’d note there was some spillover to be had from Applied’s 2017 Analyst Day, and it benefitted shares of Corning (GLW) and that led our Corning (GLW) November 17, 2017, $31 calls (GLW171117C00031000) rebounded as well to close at 0.55. While the position is still in the red, we will soon get initial order data for Apple’s iPhone 8 models and in several weeks the same for the iPhone X. At the same time, we’re noticing that even Costco Wholesale (COST) is now selling TVs in excess of 70” in size with prices in some cases as low as $1,800. We see these prices shifting demand much the way they did several years ago when prices for 50” and 60” TVs hit similar levels. This demand shift is another incremental layer in glass demand that bodes well for Corning shares in the coming months and our GLW November calls.
- We continue to have a Buy recommendation on the Corning (GLW) November 17, 2017, $31 calls (GLW171117C00031000) that closed last night at 0.55
- Our protective stop loss for this position remains set at 0.25, and we’ll look to boost that level of protection in the coming days and weeks as the calls trade higher.
Adding a layered call approach to Walmart
As we make the trade in the AMAT calls this morning, we’ll look to repurpose a portion of the proceeds to improve the Tematica Options+ position in Walmart (WMT) by adding a layered strategy to the mix. Recently Walmart shares have traded off despite the company’s expanding efforts to position itself for not only the upcoming holiday season but our Connected Society tailwind as well. This week, Walmart dipped its toe further into that tailwind by testing a new food delivery service just as Amazon partnered with Olo for online food ordering. As we shared when we added the WMT calls, Walmart is stepping up its game to compete with Amazon, and we continue to see the two separating from the retail pack over the coming months.
- To better position Tematica Options+ and its subscribers, we’re going to use the recent pullback in WMT shares and add the Walmart (WMT) Jan 2018 80.000 calls (WMT180119C00080000) that closed last night at $2.68 with a Buy rating.
- As we do this, we’ll set a protective stop loss at 1.80 for this new WMT call option.
- We will be patient with this layered strategy, but we will also keep the existing stop loss at 1.50 for the Wal-Mart (WMT) January 19, 2018, 82.50 calls (WMT180119C00082500) that closed last night at 1.66.
