August 15, 2022
Cooking Without Gas
Electric-vehicle maker Rivian Automotive (RIVN) reported earnings on Thursday afternoon that met on earnings but easily beat on revenue. In fact, revenue was up 283% from the previous quarter. But the company also warned that 2022 losses would be wider than expected. However, preorder growth is strong, and the company reiterated its projection of producing 25,000 vehicles this year.
The market didn’t seem to know how to take to the news. Analysts reacted with target price increases and decreases, though there were no ratings changes. The target price spread is ridiculously wide, ranging from $24 to $147. The average is $60.31, which is 55% higher than Friday’s close. The stock closed flat on Friday.
What is much clearer, however, is that the stock is in a substantial uptrend, gaining nearly 60% in the past six weeks. This rally has been guided by the 20-day moving average, which currently sits at $34.76. Note that the short put strike of our credit spread (34) is below the 20-day, so continued trendline support should keep our spread out of the money.
This trade is a bet that RIVN’s revenue growth will outweigh its bottom line losses, much like Amazon in its early days. If you agree that RIVN will continue to rally above its 20-day moving average (blue line), consider the following trade that relies on the stock staying above $34 (red line) through expiration in seven weeks:
Buy to Open the RIVN 30Sep 32 put (RIVN220930P32)
Sell to Open the RIVN 30Sep 34 put (RIVN220930P34) for a credit of $0.50 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $38.90 close. Unless RIVN surges 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 $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If RIVN closes above $34 on September 30, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).
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.
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).
Zurich-based Chubb Limited (CB) is the world’s largest publicly traded property and casualty insurance company. CB reported earnings this week that topped estimates. But the market wasn’t sure how to react, as analysts offered a mix of target price increases and decreases. What’s clear, however, is that analysts are overwhelmingly bullish toward CB, as 84% give the stock a buy or better rating. Perhaps this is due to the “conventional” wisdom that insurance companies benefit from rising interest rates.
But analysts would be well advised to check out CB’s chart. Despite the solid earnings numbers, the stock ended the week flat. Moreover, it failed to break out of a four-month downtrend that has seen the stock drop 14%. This slide has been guided by the 20-day moving average (blue line in chart), which hasn’t allowed a daily close above it since early June. Above that lies the 50-day moving average (red line), which has yet to be tested. It sits at the $196 level, just a point above the short strike of our call credit spread. At its current slope, it will fall below this strike in the coming week. Thus, the stock will have to pierce two points of resistance to move into the money.
If you agree that the 20-day moving average will continue guiding CB lower, consider the following trade that relies on the stock staying below $195 (green line) through expiration in seven weeks:
Buy to Open the CB 16Sep 200 call (CB220916C200)
Sell to Open the CB 16Sep 195 call (CB220916C195) for a credit of $1.40 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $188.64 close. Unless CB 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 $138.70. This trade reduces your buying power by $500, making your net investment $361.30 per spread ($500 – $138.70). If CB closes below $195 on September 16, both options will expire worthless and your return on the spread would be 38% ($138.70/$361.30).
Monday September 5th. Market closed for Labor Day
Monday October 10th. Market closed for Columbus Day
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