Fear is a powerful emotion. Even more powerful may be the fear of missing out.
A good example is the chip rally.
You may be tempted to jump in immediately. If you’re in that camp, a more prudent approach might be to use options to de-risk your capital.
chip manufacturer applied materials Provides interesting opportunities. The company will announce its financial results on Thursday. The June 400/480 in-the-money call spread offers an attractive alternative to long stocks for investors who want to express a bullish view without the downside of capital commitments or outright ownership.
By buying a June 400 call “in the money” well below Friday’s closing price of $435.44 and simultaneously selling a June 480 call “out of the money” against it, the resulting spread contains very little “outside” premium. This means the position behaves like a stock, offers a well-defined risk, and has little or no ‘theta’ or decay over time.
The call spread involves approximately a 10% increase (or decrease) in the underlying stock, and the risk is limited to the net debit paid against the spread, or approximately $35.50 as of Friday’s close. This reduces the significant downside of owning 100 shares outright and requires significantly less capital to trade compared to buying the stock directly, while maintaining strong directional exposure.
Just three quarters ago, the stock price fell more than 14% following the earnings report. This is a reminder that even a good story can have unpleasant interruptions.
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Earnings growth has accelerated over the past few quarters. Importantly, guidance trends remain constructive as management continues to demonstrate confidence in both near-term execution and long-term growth drivers. Analysts have been steadily revising their forecasts upward, reflecting improved prospects for future cash flows and expanding profit margins.
Technically, the setup remains attractive. The stock remains above its rising 150-day moving average. Strength relative to the broader market and peers continues to improve, demonstrating continued leadership characteristics.
Applied Materials Year-to-date
Cumulative days have consistently outpaced delivery sessions in recent weeks, and volume trends support this increase. Only Bollinger Bands, Keltner Channels, or Stochastic Oscillators are giving any warnings, suggesting that the stock price may be at the upper end of their respective channels. This also confirms that a risk-defined strategy can be better than an outright long position in the underlying asset.
The main bearish case centers on valuations. The stock is currently trading at a much higher historical average earnings multiple of 33x, compared to an average of 23x over the past five years. As expectations built into stocks rise, slowing growth, compressed margins, or soft forward guidance can cause multiple contractions.
Additionally, crowded positioning can amplify volatility if overall market sentiment weakens or if investors move away from high multiple growth stocks.
Again, this confirms the defined risk of a call spread rather than an outright purchase of the stock. (Holders of stocks may consider a 400/480 “collar” to establish risk/reward characteristics similar to a call spread, but be sure to check with your tax professional about the implications.)
Still, for bullish investors looking for defined risk and efficient upside participation, the June 400/480 call spread is a way to provide a disciplined position for continued strength while avoiding the full downside of holding the stock for the long term. The company’s stock price has risen 71% since the beginning of the year, driven by a sharp rise in semiconductor stocks.
