John Maynard Keynes famously said, “Markets can remain irrational longer than they can remain solvent.”
This is good advice for anyone looking to short a chip stock simply based on price movement.
I especially like chip stocks, which are surging. Marvell Technology (MRVL). The AI infrastructure story is real, the custom silicon wins are real, and the stock’s leadership reflects true fundamental momentum. But after the bell rings, leading up to Tuesday’s earnings call, I’m not following it.
MRVL sits at the intersection of hyperscaler capex and custom ASIC demand. These are two of the strongest long-term tailwinds in technology. Institutional money has been spinning heavily into the name, and the price movement shows that. It’s up over 130% year-to-date and over 220% over the past 52 weeks.
Marvell Technology, 1 year
The problem I have is that the bull market continues unabated. As I write this, MRVL is back at new highs and the 14-day RSI is above 70 (albeit not as much as it has been recently), indicating that the pace of relative outperformance is slowing. This is not a sell signal per se, but it does raise the question of how much is already priced in for a stock that is already hugely popular. Notice how far MRVL is currently above its long-term moving average (top graph) and how option premiums are currently rising relative to each other (bottom graph)
*The options market is pricing in a ~13.5% move through the end of this week, which is much larger than the 10-year average return change of 8.5%. ”
Indeed, the recent eight-quarter average of approximately 11.75% is close to the straddle’s current price, indicating that MRVL is capable of exceptional price movement. But what about piling a nearly 20% rally on top of an already extended chart? That’s a much more difficult question.
On the other hand, the forward P/E ratio has increased to approximately 45 times, the highest level for this stock in 10 years. And importantly, this comes alongside the most aggressive sales and profit growth forecasts seen in the same period. Setup requires execution. There’s no room for disappointment with this multiple.
This is my positioning. I want to touch MRVL but want to get paid to wait for it at a better level. I want to own the stock at a discount, even if the stock price drops or stalls post-earnings. If it breaks, collect the premium and move on.
trade
Static yield: >2.2% in approximately 11 days. If you can get a 70% annual return, that’s good. In the worst-case scenario, your stock would be 19% cheaper. Our system highlights that similarly structured trades on MRVL have historically had very high win rates (see below).
This is a structure with a high probability of profit. You’re not betting on a big down quarter. They are simply claiming that MRVL will not plummet and will continue to fall. Considering the basic background, that’s a reasonable view.
But the key discipline here is simple. Just because a story is good, don’t factor it into your bottom line. Buy weakness. Don’t chase strength.
