Sandisk stock is bouncing — how to play earnings with limited risk: Alpha Options Playbook

Sandisk (SNDK) has rallied hard disconnected the lows, but the banal is inactive good beneath its June high. That sets up an net commercialized aimed astatine much upside without paying for the full banal move.

Sandisk reports net Wednesday aft the bell. Buying 100 shares adjacent existent prices would outgo much than $140,000.

Options connection different route, letting an capitalist summation vulnerability to 100 shares with little wealth upfront. One anticipation is simply a bull telephone spread.

Each connection describes portion of the trade. Bull means the capitalist expects the banal to rise. A call gives its purchaser the close to acquisition shares astatine a fixed price. A spread combines 2 options. Here, the capitalist buys 1 telephone and sells different astatine a higher price.

Both options expire connected Friday, Aug. 21.

The capitalist buys 1 $1,500 telephone for $154.50 per stock and sells 1 $1,650 telephone for $101.20 per share. Since each declaration covers 100 shares, the archetypal telephone costs $15,450, and the 2nd brings successful $10,120.

That leaves a nett outgo of $53.30 per share, oregon $5,330 for the afloat trade.

Options traders telephone that the net debit. In plain English, it is the wealth paid up front.

Yahoo Finance AlphaSpace

The AlphaSpace illustration supra shows the archetypal portion of the commercialized — the $1,500 call. That enactment gives the capitalist the close to bargain Sandisk astatine a onslaught terms of $1,500.

Buying that telephone unsocial would beryllium expensive. AlphaSpace is showing implied volatility adjacent 144% — meaning options traders are pricing successful unusually ample swings.

Selling the $1,650 telephone helps wage for it.

That lowers the magnitude astatine hazard and reduces the terms Sandisk indispensable scope for the wide commercialized to go profitable. In exchange, the capitalist gives up immoderate further nett supra $1,650.

The payoff illustration beneath flattens astatine some ends due to the fact that the maximum nonaccomplishment and maximum nett are fixed.

Bull telephone spread: Long 1 Aug. 21 $1,500 telephone and abbreviated 1 Aug. 21 $1,650 telephone for a nett outgo of $53.30. · Yahoo Finance investigation of AlphaSpace data

If Sandisk finishes astatine oregon beneath $1,500 erstwhile the options expire, some calls expire unused. The capitalist loses the afloat $5,330 paid up front, but nary more.

The commercialized breaks adjacent astatine $1,553.30, astir 9% supra the banal terms erstwhile the presumption was priced. Above that level, nett rises until Sandisk reaches $1,650. At $1,650 oregon higher, the summation tops retired astatine $9,670.

The prime of $1,650 is not arbitrary.

Sandisk closed astatine a grounds $2,335 connected June 25 earlier falling to $1,015.89 connected July 29. The halfway constituent of that diminution sits adjacent $1,675, marked by the reddish dotted enactment below.

The reddish dotted enactment astatine $1,675 astir marks the midpoint betwixt the all-time precocious and the caller low. · Yahoo Finance AlphaSpace

That country whitethorn go an obstacle arsenic investors who held done the sell-off usage the rebound to exit and abbreviated sellers look for different entry.

Unlike the covered telephone utilized successful past week's Apple Options Playbook, this commercialized does not necessitate owning 100 shares first. But the hazard is inactive substantial.