Storage-device maker Western Digital (WDC) reported earnings on Friday that topped estimates on both the top and bottom lines. However, both measures fell short of the year-ago figures. More importantly, the company issued dismal guidance, blaming softer consumer spending and inventory corrections. Q1 revenue is now expected in the $3.6-3.8 billion range, far below the $4.74 billion consensus estimate. Earnings per share looks even worse, with an expected range of $0.35-0.65 compared to the $1.96 consensus.
Oddly, there were no target price changes for the stock on Friday. However, given that analysts are strongly bullish toward WDC and have a median target price of $65 (38% above Friday’s close), the weak guidance is sure to bring some price cuts, if not outright downgrades.
The stock reacted appropriately after the news, falling nearly 10% before closing 5% lower. This put an abrupt halt to WDC’s monthlong rally that saw the stock gain 20%. The 50-day moving average also marked a top to the uptrend. Friday’s fall also pulled the shares below their 20-day moving average, a trendline that has guided the past three weeks of the rally. Note that the short call strike of our credit spread sits on the 50-day, which will move below the 50 level this week. Thus, the stock will have to pierce both the 50-day (blue line) and 20-day (red line) moving averages to move the spread into the money.
![](https://www.terrystips.com/wp-content/uploads/2022/08/WDC-Chart.png)
If you agree that WDC’s rally is over, consider the following trade that relies on the stock staying below $50 (green line) through expiration in six weeks:
Buy to Open the WDC 16Sep 52.5 call (WDC220916C52.5)
Sell to Open the WDC 16Sep 50 call (WDC220916C50) for a credit of $0.60 (selling a vertical)
This credit is $0.04 less than the mid-point price of the spread at Friday’s $47.09 close. Unless WDC drops quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $58.70. This trade reduces your buying power by $250, making your net investment $191.30 per spread ($250 – $58.70). If WDC closes below $50 on September 16, both options will expire worthless and your return on the spread would be 31% ($58.70/$191.30).
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