Will This Lone Wolf Get Lam Research Right?

Does somebody know something about Lam Research Corporation (Nasdaq: LRCX) that’ll send the shares lower by April 26?

The reason I ask is because last Friday, around 1:30 in the afternoon, someone stepped in and paid $500,000 for 500 of the Lam Research April $200 puts (the weekly series expiring April 26). These puts were bought on the ask for $10 when the stock was trading for $194.10.

As I write you today, this “sharp paper” customer is down around $50,000, as these puts currently trade between $9 and $9.25 per contract.

But with six market sessions to go before expiration – is something big about to happen to Lam Research Corporation that’ll move this half-million dollar trade (that’s now worth $450K) back into the profit zone?

Let’s take a closer look…

Lam Research Corporation manufactures wafer processing semiconductor equipment – which includes front-end wafer processing and back-end wafer-level packaging. In other words, they make the “guts” that are contained in many of the devices that you use every day: smartphones, smart cars, smart watches and so forth.

Could this be a directional earnings play?

After all, these puts expire April 26, and the company reports earnings after the close on Wednesday, April 24.

Interestingly enough, some of the other big names reporting after the close that day are Visa, Tesla, Facebook, Microsoft and PayPal. Does this put buyer think the market will be too focused on these major names – and overlook the potential in Lam Research?

Perhaps.

But that alone isn’t enough to plop down a cool half million on a position like this.

Analysts expect the company to post earnings per share of $3.38 on revenues of $2.4 billion. Clearly, this put buyer thinks it’ll miss these numbers, triggering a drop. But even this maneuver appears like it’s swimming upstream.

You see, over the last three earnings reports, Lam Research Corporation shares have moved up 16%, 11% and 7%. I’m not saying the company couldn’t reverse this recent trend and drop when it reports on April 24. What I am saying, however, is that it sure seems like Lam Research has the right recipe for upside earnings reactions.

Maybe this put play is simply a hedge against, say, a $5 million stock position in Lam Research?

Well, that doesn’t make sense to me either. After all, when constructing a hedge play, you want to spend as little upfront capital as possible for the maximum amount of protection. In this case, logically, you wouldn’t buy put protection that’s already $6 in the money.

Maybe other sharp paper traders are moving into puts as well?

That’s not the case either. You see, open interest on the April $200 put line stands at 1,256 contracts. For comparison, the total open interest for the surrounding four put lines (which are the $195 puts, $197.50 puts, $202.50 puts and $205 puts) stands at 557 contracts – total.

So what’s the conclusion here?

Add it all up, and this appears to be a lone wolf trader playing the odds that Lam Research won’t be able to move up four earnings reactions in a row. Maybe they’ll be right – and maybe they’ll be wrong. But to my eye, unless they have some sort of insider information, this looks like a 50-50 proposition.

I think it’s similar to the guy at the roulette table who sees that the last three rolls landed on red and thinks there’s no way a coin flip will land on heads four times in a row – and therefore moves all his chips to black. Such betters forget that the odds of red on the next roll are still 50-50.

Action Plan: While the logic seems right, it goes against one of the biggest trader sayings in existence, “The trend is your friend.” If anything, given the company’s recent earnings reactions, an earnings strangle on Lam Research Corporation seems like the most appropriate move.


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