Options bulls ride fast moving semis

If there's one lesson traders learned this year, it might be "don't mess with a fast-moving semi".

And no, we're not talking about 18-wheelers barreling down the highway. Semiconductors have had even greater momentum, fueled by cloud computing, artificial intelligence, gaming, mobile devices, and a growing global economy.1

Trend followers initially hitched a ride on flashy chipmakers like Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), which seem to dazzle techies on a regular basis with new feats of cyber-innovation. But recently, market pros spied another stock moving into the fast lane. It might not be as sexy, but it's a key player in the entire eco-system: Applied Materials (NASDAQ: AMAT), the world's top supplier of chip-making equipment.

And that's where options traders set their sights on Thursday, gobbling up more than 32,000 October 55 calls. The initial blocks priced for $0.34 but premiums gradually rose to $0.68 as the stock pushed higher. (It was also one of the busiest equity derivatives in the entire market.)

Calls fix the level where a security can be purchased, which can explain why they doubled in a matter of hours from a relatively small move in the underlying shares. Here's a snapshot of what could happen by expiration at the end of next week:

  • If AMAT keeps climbing to $56, those calls will be worth $1. That would be a gain of 50-100 percent, depending on where buyers got filled.
  • Say it hits $57. Then the options will shoot up to $2, more than doubling everyone's money from a move of less than 6 percent in the shares.
  • But if the stock remains under $55, the calls go worthless. Breakeven's between $55.34 and $55.68.
  • AMAT ended the session up 0.15 percent to $53.31. It's gained 65 percent this year, and is back to levels last seen during the tech bubble early in the century.
Applied Materials (AMAT) 4/20/17 - 10/12/17 chart

Source: OptionsHouse by E*TRADE.

"Markets are growing with a broader set of demand drivers," CEO Gary Dickerson gushed the last time earnings were released in August. He also beat the AI drum for investors last month,2 noting that smarter circuits require more complex designs and therefore more tooling… good news if you sell things like silicon etchers, planers, and photomasking devices. It also got a boost from Micron Technology's (NASDAQ: MU) memory-chip bonanza and some positive analyst calls of late.3

One more thing: AMAT doesn't have any events scheduled before expiration next week, but two of its key competitors – Lam Research (NASDAQ: LRCX) and ASML (NASDAQ: ASML) – report earnings. So Thursday's call buyer may be looking for those to provide potential catalysts.

Bottom line: AMAT has been accelerating in recent weeks and the bulls are looking for more upside in the near term.


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1. Benzinga: 2 Up, 2 Down: Goldman Adjusts Semiconductor Stock Ratings. 9/13/17. Barron's: Applied Materials’s Earnings Can Surge in New Normal of Chip Capex, Says RBC. 9/18/17. Marketwatch: Micron outlook, capex hike spark rally in memory chip makers. 9/27/17.

2. Semiconductor Industry Association: Global Semiconductor Sales Increase 24 Percent Year-to-Year in July. 9/5/17. Semiconductor Industry Association: Monthly Semiconductor Sales Reach $35 Billion Globally for First Time in August. 10/2/17.

3. Applied Materials, Inc. (Press release): Applied Materials Delivers the Best Quarter in Its 50-Year History. 8/17/17. Applied Materials, Inc. (Press release): Applied Materials Focuses on Enabling Artificial Intelligence Era at 2017 Analyst Day. 9/21/17.