Adding a call option play on Applied Materials

In yesterday’s Tematica Investing, we shared our view on why Apple’s (AAPL) special event on Tuesday was rather lame. We could reiterate that view here for you, but we’d rather be more productive and that means adding a new position to the Tematica Options+ Select List. The seeds of this new idea are related to Apple’s soon to be released iPhone X model, which incorporates organic light emitting diode (OLED) displays, an industry we know to be capacity constrained. One of the reasons why Apple is reportedly holding off until November to ship iPhone X is supply constraints for OLED displays.

We’ve talked quite a bit about the expanding number of applications for OLED displays, and why that means we will be seeing pronounced capacity additions over the coming quarters. If Apple follows its historical paradigm it means first introducing an OLED display in the iPhone X then expanding it across other lower-end iPhone and iPad models in the coming quarters. Previously, we’ve seen as Apple implements new technologies in the iPhone, there is soon a copycat wave across other smartphone manufacturers. While there have been smartphone manufacturers that have adopted OLED displays in some models, we see Apple’s move as driving those displays into the main stream. Now add in larger format TVs and the burgeoning interior automotive lighting market, and it’s apparent the OLED industry will be capacity constrained for some time.

This was one of the primary reasons we added shares of Applied Materials (AMAT) to the Tematica Investing Select List. Other reasons include escalating demand for memory as well as China’s demand for semiconductor capital equipment as it looks to build its in-country supply of chips. We’ve had a stellar run with AMAT shares, which as of last night’s market close is up 27% since added them to the Tematica Investing Select List last February. By comparison, the S&P 500 is up just 5.6% over the same time frame.

When Applied reported its June quarter results, it not only bested expectations but also boosted its outlook given the underlying fundamentals for its display and semiconductor capital equipment businesses. As those fundamentals have improved over the last several weeks, we expect the company to give another upbeat business update at its September 27^th Analyst Day. In the short-term, we’re looking to capitalize on this by adding the Applied Materials (AMAT) October 20, 2017, 50 calls (AMAT171020C00050000) that closed last night at 0.32. We would be buyers of these calls up to 0.40, and as we make the trade we’re setting a stop loss at 0.15.

• We’re issuing a Buy on Applied Materials (AMAT) October 20, 2017, 50 calls (AMAT171020C00050000) that closed last night at 0.32.
• We would be buyers of these calls up to 0.40, and as we make the trade we’re setting a stop loss at 0.15.

Watching Friday’s August Retail Sales Report

On Friday, we’ll get the latest edition of the monthly retail sales report. Given our call positions in both Amazon (AMZN) and Wal-Mart (WMT), we’ll be putting the findings from that report through the ringer. With the timing of Hurricane Harvey, we could see a modest impact on the August data, but we expect a more meaningful influence to turn up in the September data when it’s reported in about a month. As we dig into the August Retail Sales report, which should see a sequential uptick due to Back to School spending, we’ll be looking to see if the pace of digital shopping picked up vs. July. This would signal Back to School shopping share gains, just like we saw in 2016 and in 2015.

New data published by GOBankingRates finds that more than half of Americans (57%) have less than $1,000 in their savings accounts. As we get ready to embark on Halloween spending then Thanksgiving spending followed by the year-end holiday shopping season, we see both Amazon (AMZN) and Wal-Mart as well positioned beneficiaries of Cash-Strapped Consumer looking to stretch their spending dollars.

Since adding the Amazon (AMZN) December 2017 $1000 calls (AMZN171215C01000000) in the back half of August, the position has climbed more than 50%. Knowing that Amazon shares can be volatile in the short-term, we are instilling a stop loss at 40.00, which will ensure a minimum return of just under 17%. In keeping with past practices, as Amazon shares continue to inch up, elevating the calls along the way, we’ll look to revisit that stop loss level.

Last week a position in Wal-Mart (WMT) January 19, 2018, 82.50 calls (WMT180119C00082500) with a 1.50 stop loss. While the shares came rather close to that stop loss level early this week, they rebounded as the estimated Irma damage to the Southeast was less severe than expected. At current levels, these Wal-Mart calls remain a Buy.

• With the Amazon (AMZN) December 2017 $1000 calls (AMZN171215C01000000) now up more than 50% from our purchase, we would not commit fresh capital to this position. As we head into the key shopping season of the year, subscribers should continue to hold these calls.
• We are adding a stop loss on the Amazon (AMZN) December 2017 $1000 calls (AMZN171215C01000000) at 40.00
• We continue to have a Buy on Wal-Mart (WMT) January 19, 2018, 82.50 calls (WMT180119C00082500) and the corresponding stop loss remains at 1.50.