Markets continue to tell the tale of two worlds as data diverges into two paths — one where we see a soft landing and another where we see recession. With this in mind, this column will explore a combination spread trade in Axcelis Technologies, a leader in recent years among semiconductor stocks. The setup combines call and put options in ACLS stock.
IBD's take on the current stock market trend suggests a more cautious tone in terms of risk. And that should continue into the first weeks of October if sentiment follows with seasonality. Weekly range expansion from near-term volatility should also continue. That will allow more revenue generation in the options market.
The semiconductor space has proved to be filled with names that have held the market higher, including ACLS stock. But even these companies have recently come under pressure in the near term. Nvidia, Super Micro Computer and Lattice Semiconductor have all come off their highs and are creating new price ranges.
However, with the September IPO set for Arm Holdings, this should send a flurry of activity back into the semiconductor space. Why? Sympathy moves commonly take place in this kind of scenario with a much anticipated IPO since late 2022.
So with that backdrop, a bit of luck might have come our way in ACLS stock as a leadership change at the CFO level and some insider selling (which could be for a variety of reasons, to include college tuition fees due in the fall for children) has pulled the stock into a support level worth a second look.
ACLS Stock Today
A closer look at ACLS stock shows a strong company with a strong chart testing its 50-day simple moving average.
ACLS holds a Composite Rating of 99 and a No. 1 ranking in its group leadership within the semiconductor industry. Significant opportunity for upside remains in the near term, should the ARM IPO light the fire under this group once more.
Inside the option toolbox, for this limited-risk bullish combo trade, we are buying a call spread and selling a put spread. It allows us to offset the cost of the call spread that is out of the money by selling a put spread that is also well out of the money.
The limited risk bullish combo for ACLS goes as follows:
- Buy to open 1 ACLS Oct. 20-expiration call with a 200 strike price
- Sell to open 1 ACLS Oct. 20 230 call
- Sell to open 1 ACLS Oct. 20 160 put
- Buy to open 1 ACLS Oct. 20 150 put
Total debit of $2.08 per combination of the above puts and calls in recent trading means the break-even cost for the stock stands at $202.08. Namely, calculate this as the price of the long call strike plus the strike of the call option involved.
The goal here? Allow the price of ACLS stock to spike into the ARM IPO in September and through the hype. Then cover the position into the close of September.
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Buying the long call spread while selling the short put spread in ACLS stock opens a range of profit that is almost $28 wide (or up to $2,800 per set on contracts). Had we only bought the call spread, it would cost more than $5 more and reduce the profit upside by over 20%.
The downside here? If ACLS stock rolls over by another 20%, the short put spread will be in the money. For this reason, we need to see a bounce quickly off the 160 level if the chart fades.
Let's identify key chart levels. Strong support for Axcelis appears at $160. But if it fails, $120 is easily the next step down for ACLS stock. This means that if we test $160 and bounce, we should cover the trade, even if it looks like recovery under the premise of the strength of ARM that creating a "sympathy event."
Managing The Trade In ACLS Stock
Let's consider these potential scenarios for the ACLS bullish combo:
- Stock moves quickly higher and we breach and hold the 230 level in the days following the IPO of ARM. We cover both the long call spread and the short put spread.
- ACLS stock grinds lower and it hits our personal risk threshold, and we exit the trade.
- Axcelis grinds lower, tests $160 and bounces and we exit the trade. The fade in price should not happen if the sympathy play is valid.
Please note that within the "sympathy-play" structure of an IPO, sharp moves in price over a few days is common. However, extended upside moves are not.
As with all trades, consider what you like about holding the position in the first place. Consider your risk carefully.
Finally, be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X/Twitter and Stocktwits at @AnneMarieTrades
