Protecting a SanDisk Position Ahead of Earnings

Semiconductor firm, and flash memory specialist, SanDisk Corp. (SNDK) is scheduled to release its quarterlyearnings report after the close of trading this afternoon. Analysts are looking for a profit of $1.02 per share from SanDisk, a 15% drop from the $1.20 per share the company earned last year. The whisper number comes in a bit higher at $1.12 per share.

Historically, SanDisk has a solid record on the earnings stage. In fact, the company has bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of about 8.3%.

SNDK’s price action has been flat since the company’s last trip to the earnings confessional, with the shares up 2.6% during this time frame. From a short-term perspective, however, SNDK has been a strong performer, with the equity rallying more than 40% after tagging a fresh 52-week low of $32.24 in August. SNDK recently broke out above its 200-day moving average, and is currently consolidating into support at this long-term trendline and its shorter-term 10-day trendline.

Daily SNDK chart with 10-day and 200-day moving averages

Sentiment is divided ahead of SNDK’s quarterly earnings report. Wall Street analysts appear to have high hopes for the firm, as 19 of the 23 analysts following the shares rate them a Buy or better, compared to just three Holds and one Sell. Additionally, the average 12-month price target for SNDK rests at $58 – a premium of 28% to the stock’s close at $45.18 on Wednesday.

Options traders, meanwhile, have a more pessimistic view of SNDK heading into tonight’s release. During Wednesday’s trading, put volume arrived at 15,224 contracts, compared to call volume of 12,047 contracts. The result was a single-session put/call volume ratio of 1.26, a significant jump from SNDK’s 10-day average put/call volume ratio of 0.82. In other words, speculative options traders appear to be loading up on typically bearish put options ahead of the company’s trip to the earnings confessional later tonight.

Peak put open interest totals 22,617 contracts at the out-of-the-money October 41 strike, while another 14,747 puts are open at the October 43 strike. On the call side, peak open interest lies at the out-of-the-money January 2012 50 strike, totaling 16,959 contracts, while 11,126 calls are open at the October 50 strike.

While this build in put open interest ahead of SNDK’s quarterly report could be the initiation of bearish bets, we could also be witnessing SNDK stock holders protecting their positions by implementing a strategy called a married put.

For example, let’s say that you want to buy 100 shares of SNDK at $45 but are concerned that the stock could decline following a weaker-than-expected quarterly report. To protect your stock position, you could purchase one November 45 put, which was last asked for $2.76, or $276 per contract. In the end, the total cost for your option position would be $276, while the stock position would total $4,500.

In this trade, the put options act as short-term insurance for the long stock position. If SNDK closes below $45 per share when November options expire, you would be able to exit the position while only suffering the loss of the cost to purchase the November 45 put. Below is a profit/loss chart:

Profit/loss chart for a SNDK married put

Disclaimer: I hold no open positions on any stocks, securities, or options mentioned above. Any ideas, and/or forecasts, expressed or implied herein are for informational purposes only, and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Use caution when trading options, and never risk more than you can afford to lose.



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