Axcelis Technologies sits high on the list of semiconductor outperformers in the market and the stock hit new highs after its earnings report late Wednesday.
With accumulating volume as its price rises, this chip company has a Composite Rating of 97 and sits as a leader in IBD's chip-equipment industry group.
The stock sits around 123, which might have many of us wishing we were involved in the upward move from its November breakout without having to wait for the next buy point.
To engage here, I like the short put because my intention would be to acquire the stock on a pullback.
Axcelis jumped nearly 6% Thursday in response to Q4 earnings that topped estimates, and a positive outlook.
There was increased volatility in the chart due to the unknown of earnings, which gave the options more premium.
I like selling puts under this particular environment because we are able to benefit from volatility decreasing after the release. Also, because we are working with a stock that has both technical and fundamental strength.
Strategy Works Well For Strong Upward Trends
Strong upward trends are defined to be trends that show moving averages showing clean upward moves in the daily and weekly charts.
The trade:
- Sell to open the Axcelis March 17 monthly 100 puts, currently priced around 0.80 on Friday. We can sell this using a limit order.
The goal would be to hold this into expiration. If the price comes back into the 100 area, we would have been paid to wait for the chart to come back around that level.
When a chart is strong and the company shows strong fundamentals, we can be rewarded for being more aggressive by choosing a strike in the chains closer to the price of the stock.
The more aggressive trade:
- Sell to open the Axcelis March 17 monthly 105 puts currently priced around 1.45 at the midpoint (also called the "mark").
The goal would be to hold this into expiration and if the price comes back into the 105 area, we would have been paid to wait for the chart to deliver us the price near 102.10.
The difference would be the added risk in acquiring the stock at a bit of a higher price if it pulled back and we were assigned the stock.
Possible Scenarios For Semiconductor Stock Trade
Strong upward trends across several time frames suggest that the aggressive trade may indeed be the better choice. That's because the price performance under rising volume gives us the confidence to trade this stock.
However, the chart's weekly formation does show us a likely dip into the 105 region as a potential test of old support.
The risk lies in being put to the stock with the stock turning quickly and fading. So it is important to decide what your hold time is for the stock and your risk parameters around your position.
What could happen:
- The stock moves within and potentially beyond the range but returns to rest above 100 (or 105, if you chose the higher strike) by expiration. That would yield the full profit, but you do not acquire the stock.
- The stock fades into our strikes by expiration and we are able to take the stock at a reduced premium. We can manage it like we do our other positions using the CAN SLIM method.
- The stock fades and moves below either of our strikes with volume for more than five days within the expiration period. This means we must exit because the chart is in a breakdown.
