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Bullish Chip Bets
Jocelynn Drake
The semiconductor sector will take center stage this week with two of its heavy hitters stepping into the earnings spotlight.
Intel is slated to report its quarterly results after the close on Tuesday, Oct. 16, while Advanced Micro Devices will report its results after the close on Thursday, Oct. 18.
In fact, the COMP has outperformed the SMH since the start of the year, gaining more than 16%. The SMH is once again moving sideways, trapped between resistance in the 38 area and support at the 35.50 level. One has to wonder if the trust will find itself once again locked in a long-term consolidation similar to when the ETF traded between 31.50 and 34.50 from August 2006 through April 2007.
Drilling down into some of the components of the SMH, we find that Intel has also been digesting some of its gains as it sidles along support at the 25.80 level while battling resistance at the 26.50 level. The blue-chip behemoth is moving into support at its 10-week moving average, which could help launch it on the next leg of its uptrend. This intermediate-term trendline in tandem with the stock's 20-week moving average has guided the shares higher since mid-April.
Options speculators are fairly skeptical of the shares despite their steady ascent. Schaeffer's put/call open interest ratio rests at 0.61, which is higher than two-thirds of those taken during the past 52 weeks. What's more, the equity is trading above peak front-month call open interest at the 25 strike. This in-the-money option has more than 136,000 contracts in residence. With the security trading above this level, it is unlikely the shares will encounter options-related resistance.
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According to Zacks, Wall Street is expecting the company to report a profit of 31 cents per share, well above the firm's year-ago profit of 21 cents per share. Historically, Intel has matched or surpassed the consensus estimate in each of the past four quarters. Another strong earnings report from the chip company could shake loose many of the remaining bears, pushing the stock higher. For an aggressive option, an Oct. or Nov. 25 call would allow an investor to profit from a sharp rally on positive earnings.
The shares of Advanced Micro Devices have recently rebounded from their Aug. 16 low, tacking on more than 23% as they rally along their 10-day and 20-day moving averages. However, this uptrend has brought the stock into contention with resistance at its declining 50-week trendline, which it has not finished a week above since June 2006.
Considering the stock's long-term downtrend, investors remain relatively skeptical of the shares. The put/call ratio for AMD stands at 0.87, which is higher than 77% of those taken during the past 52 weeks. In other words, short-term options speculators have been more bearishly aligned toward the security only 23% of the time during the past year.
Wall Street also has its doubts about AMD. Zacks data reveal that 17 of the 22 analysts following the stock rate it a “hold” or worse. This configuration leaves ample room for potential upgrades should the company report stronger than expected earnings results.
The consensus analyst estimate for Advanced Micro Devices stands at a loss of 61 cents per share compared to its year-ago profit of 27 cents per share. Furthermore, AMD has missed the consensus estimate in three of the past four quarters. While there is ample sideline money available to fuel a significant rally in the shares in the event that the company reports strong earnings, recent history indicates that the firm is still struggling with some fundamental issues. Options players may want to wait until after the company reports earnings to jump on this opportunity.
Meanwhile, one stellar performer within the chip family is Broadcom. The stock has been in a strong uptrend from its late June low of 29.01, gaining more than 38% along the way. What's more, the stock has broken through former resistance at the 37.50 level.
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From a sentiment perspective, investors are extremely skeptical of the shares. The stock's Schaeffer's put/call open interest ratio stands at 1.45, as put open interest easily outweighs call open interest among near-term options. This reading is also higher than 95% of all those taken during the past 52 weeks. Furthermore, the stock is trading above peak October call open interest at the 37.50 strike. The lack of out-of-the-money call open interest indicates that options speculators don't expect the shares to rally much higher during the near term.
The company is expected to report earnings after the close on Oct. 23. Analysts are expecting a profit of seven cents per share, an improvement over the company's break-even results for the same period a year ago. A strong earnings report combined with growing skepticism toward the shares has bullish implications from a contrarian perspective. A November 40 call would enable a trader to lock in some profits on a rally in the shares.