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Lam Research Corporation (NASDAQ:LRCX) has been on a tear. It’s a tech marvel that CML Pro Research members are well aware of. It was added to the “Companies to Watch” list on 7-1-2017 when it was trading at $141 and as of this writing it is trading above $188. Here’s a quick two-year stock chart:
We do note the very recent sell-off in January, which was due to the Intel/AMD/ARMH CPU debacle surrounding a massive security flaw that spooked this entire segment.
LRCX develops innovative solutions that help its customers build smaller, faster, more powerful, and more power-efficient electronic devices-the kind that are driving the proliferation of technology into our everyday lives.
This space, the guts of technology, where Nvidia and Applied Materials sit, has been on a tear and that means optimism ahead of earnings is a legitimate phenomenon we can explicitly observe in the recent past. LRCX has earnings due out on 01-24-2018 and three-trading days before then is 1-19-2018.
We will examine the outcome of going long a weekly 50-delta (at the money) call option in Lam Research Corporation just three trading days before earnings and selling the call one day before the actual news.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
Often times we look at option set-ups that are longer-term, and take no directional bet — this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that’s it. It’s a bullish bet, so must be conscious of the delta risk.
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:
In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.
Below we present the back-test stats over the last two-years in Lam Research Corporation: