A Cheap Way to Play a Slowing Sector

08/24/2010 12:01 am EST

Focus: OPTIONS

No chipmaker seems to do better than SanDisk Corp. (SNDK) when it comes to running up a major gain from lows. In November 2008, SNDK stock traded around $5 per share. In June 2010, it briefly hit $50, almost achieving ten-bagger status.


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Flash memory demand has been holding up, but SanDisk is down over 10% now from its peak. So now the question becomes, “Can flash memory demand hold up at a time when all other tech is seeing a slowdown in growth?”

Apple Inc. (AAPL) and the flood of tablets coming from competitors may be a saving grace for the flash market in general. But if growth continues to slow, there won’t be any safe harbors for the companies that make DRAM, Flash, and other components. The sugar coating is that SanDisk has a long history of boom followed by bust. In the 1990s, there were long periods where SanDisk lost half—and in some cases, much more—of its value after a period of exponential price moves.


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SanDisk’s founding chairman recently announced that he would be retiring. That is not a shock, but he obviously wanted to go out on a good note rather than wait until the company was battered and was given a low-ball buyout price. To show just how much SanDisk has outperformed, SNDK stock is up over 150% over the last year while the Semiconductor HOLDRs (SMH) is barely positive. SanDisk is a mere 3.34% of the weighting of the HOLDR.


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If SanDisk starts to see any significant issues ahead, we will likely know in the next 30 to 60 days. Going out too far in a volatile (and expensive option) stock like SNDK often sets investors in a situation where they have to be “too correct” in their call.

The $41 puts for September are being offered at around $1.63 (at the time of this writing), while the $41 puts for October are being offered at around $2.50.  However, the same strike out to January 2011 trades for around $5.00 per contract, which as I’ve said, gets too expensive to go out too far.

The idea here is to get in ahead of the next major market move. Once you get in and as September nears, you can roll out from September to October if the company hasn’t warned. With a much higher beta than peers, this becomes a cheap way to bet on a slowing SanDisk, even if a “cheap bet” is a paradox.

By Jon Ogg, contributor, OptionsZone.com

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