SanDisk Corporation (NASDAQ:SNDK), a provider of data storage solutions, is set to report its fiscal quarter results next Wednesday evening. Wall Street is expecting earnings per share of 59 cents compared to $1.32 a year ago.
Next week and possibly overshadowing the SanDisk earnings number will be what’s already occurred on SNDK’s price chart. In late March SanDisk management issued a sales warning that cratered SanDisk stock by about 19%.
The surprise announcement is similar to a January warning by SanDisk, which produced its own memorable drop of around 14%. Shares of SNDK declined an additional, but much less significant 2% or so, several days later when the company released its official report and matched profit forecasts of $1.15.
Potentially different this time around is the expectation that shares of SNDK are now technically in position to rally higher after completing multiple patterns near key long-term support.
SNDK Weekly Chart Support
After well-heeded back-to-back warnings by SanDisk management and some bearish assistance from Microchip Technology Inc. (NASDAQ:MCHP) last October, SNDK stock has retreated 33% from its July highs. According to Reuters, the substantial correction has helped induce Bernstein analysts into seeing SanDisk as “an excellent takeover target;” Susquehanna Financial Group suggested that SNDK stock could be worth $86 a share to Western Digital Corp (NASDAQ:WDC).
Of course, not all analysts are on board, but even technicians don’t always see eye to eye. It’s my opinion SanDisk stock’s corrective action appears to have run its course. While uptrend lines have been broken and lower lows and highs validate a downtrend in SNDK stock, technical evidence supporting a key reversal is now in place, are available.
First, weekly or monthly chart Fibonacci cycles extending from SanDisk stock’s 2008 financial crisis and June 2012 lows to the July 2014 highs have shares of SNDK finding support slightly above a 50% and 62% retracement zone from about $56.50-$61.50. Elliott wave followers might be persuaded to see an ABC pattern and completion of five waves from the July highs to SanDisk stock’s recent lows.
Additionally, SNDK’s corrective action could be described as a Fibonacci-based two-step or mirror pattern, which when completed mark a change in trend. Lastly, these patterns are playing out against SanDisk stock’s 200-week simple moving average and lower Bollinger band, which in theory at least, should act as technical support.
Throw in an island bottom reversal pattern and we’re bullish on SNDK shares.
Referencing SNDK’s ‘trading chart’, aptly named as it includes stock/historic volatility (brown line), implied or option volatility (blue line) and SanDisk’s stock price history; we can visually review the past 12 months of mixed earnings reactions and discussed warnings.
One important takeaway from this chart are implieds or option premiums are very likely to experience a volatility crush following next week’s announcement. Not only are implieds near the highs of three of the past four report’s elevated readings, they’re also above underlying SNDK volatility levels.
Further, SanDisk option premiums, as we can see, have a good track record of getting crushed immediately following the report.
SNDK Bull Call Verticals
To play the SanDisk earnings event, a SNDK bull call vertical spread is a simple and smart way to limit risk to the premium paid and reduce one’s exposure to long premium risk associated with a volatility crush.
Long premium or Vega risk is reduced with the bull call vertical because the spread sells an equal amount of contracts to partially offset the long contract exposure. It will be stressed, where the SNDK vertical is placed, is of critical importance.
Strike width construction, the vertical’s relation to SNDK shares and what month you use to initiate are key to determining how much or how little this component of option premium will impact your position or how other risks like time decay might be of even greater importance.
In reviewing SNDK’s option board, either the Apr $69/$71 trading at last check for 80 cents, or weekly May 8 series $70/$73 trading for $1, are two bull call vertical spreads to consider given the opportunity to trade 1-point strikes and weeklys in SanDisk.
The latter SanDisk vertical allows an additional three weeks of time for positioning, but will (typically) be slower to realize its maximum profit due to that same time feature/benefit and higher strike placement. But if SNDK does rally, this spread can deliver $2 in profit above $73.
The former spread and very short-term, tighter vertical costs less, breaks even at $69.80 compared to $71 and even maximizes its $1.20 profit at that same price in SNDK shares. So close to expiration (following the report), profits can also build faster.
However, time can also be the enemy. If SanDisk stock fails to cooperate and remains below $69 late next week, traders will be facing a complete loss of the debit paid.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. As of this writing, he held no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.