Applied Materials (AMAT) reports quarterly results after the close today. Wall Street expects adjusted earnings of $3.38 per share on $9 billion in revenue. The company makes semiconductor equipment and keeps riding the artificial intelligence spending wave as chip makers pour money into new manufacturing capacity and advanced packaging. William Blair started coverage this week, calling AMAT well placed to gain from growing global chip capacity. The company beat expectations last quarter, and investors want to see if management gives another strong outlook.
The Stock and the Setup
AMAT is up more than 100% since the start of this year, with a 116% gain year to date and a 192% gain over the past 12 months. It rallied from 154 to $739, then fell back into the 550s - an elevator up and an elevator down. Guidance will be the key. This is a real bellwether for what is happening across semiconductors. AI demand flows straight through AMAT: advanced logic, DRAM, and advanced packaging demand all tie back to AI, and management should comment on all of it. Watch for their views on China exposure and supply chain updates. They are also building a project called the Epicenter and will likely give an update on it.
Taiwan Semiconductor (TSM) reported record July numbers, with revenue up about 36% year over year. AMAT's EPS is expected up about 36% year over year and revenue up about 23%. Since AMAT builds the machines Taiwan Semi needs to produce chips, the report should be good based on what other semiconductor equipment makers and TSM have shown.
The concern is investor exhaustion and valuation. The stock sits at its 50-day simple moving average, which has acted as resistance right around the current price, and it entered the report in bear market territory. On a trailing basis the P/E is about 52 times; the forward P/E is still close to 40 times. That rich valuation has to be weighed against a likely strong report, so the reaction will probably be split and volatile.
The Bullish Trade: Short Put Vertical
The expected move is about $37. Lined up against the stock price, a high probability short put vertical fits. Using the August 14th weekly options, sell the 525 put and buy the 515 put - a $10 wide spread collecting about a $225 credit (now around $235). Risk is about $775, so there is far more risk than reward, but the trade wins with a better chance of success. The 525 strike has about a 73% probability of finishing out of the money, matching a one standard deviation move. The break even is $522.75. This is neutral to bullish: the stock can rise, sit still, or even fall and still profit as long as it stays above the break even. The higher implied volatility going into earnings lets you collect more premium. After the report, the volatility crush hits, and if the stock closes above 525 tomorrow you keep the full credit.
The Bearish Trade: Unbalanced Put Butterfly
For a bearish view, an unbalanced put butterfly on the same August 14th weeklies that expire tomorrow at the close. Buy one 555 put (roughly at the money), sell two 530 puts, and buy one 520 put. The debit is about $760, though closer to $715 now since the stock moved higher - that is the risk. Max profit is about $1,740, roughly a triple, hit if the stock drops to the 530 strike where you sold the two options. The break even is $547.50 to the downside, well inside what the options market is pricing.
Why the butterfly instead of a plain 555/530 put vertical? The straight vertical costs about $10-12, so it carries much more risk. The butterfly is a measured, moderately bearish position that wants the stock to land as close to 530 as possible. With the vertical you need the stock to push all the way below 530 for the better payout. Even if AMAT falls past the 520 strike on the butterfly, the trade still returns about a double. The structure is long a $25 put vertical and short a $10 put vertical, so if the stock blows through the one standard deviation move - as many names have this earnings season - you stay protected and still profit, just less.
The Common Thread
Both trades share the same direction. Each one profits if AMAT drops to about $530 and holds there.
