Reasons we recommended a put option on AMAT
Subscribers to Schaeffer's Weekend Trader options recommendation service received this AMAT commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.
Applied Materials Inc (NASDAQ:AMAT) stock recently struggled to gain traction following its Feb. 14 earnings report, breaking below a trendline connecting higher lows since late December. While shares attempted a post-earnings rally, they were quickly rejected at the confluence of their 50- and 80-day moving averages. The 80-day trendline was particularly significant over the past year -- acting as support in April 2024, flashing a sell signal in July, and capping rallies in both September and November.
Now, with the stock more than 30% below its July all-time high and slipping beneath prior support levels at $175, downside risk appears elevated, making this an ideal time to buy puts.
Wall Street analysts remain overly optimistic, with 26 “buy” ratings compared to eight “hold” recommendations and just one “sell,” leaving plenty of room for potential downgrades.
Meanwhile, options traders are showing signs of over-exuberance, with AMAT’s 10-day call/put volume ratio of 2.10 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sitting in the 92nd percentile of its annual range. Similar readings over the past year have preceded weak price action 50% of the time, reinforcing the stock’s vulnerability at current levels.
Our recommended put options has a leverage ratio of 8.0 and will double on an 11.3% drop in the underlying equity.