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Evaluating The $1 Million Bet On Applied Materials, Inc. (AMAT)

One trader bought to open more than 15,000 Applied Materials, Inc. calls on Friday

by 7/28/2014 10:11 AM
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Applied Materials, Inc. (NASDAQ:AMAT) has been in a sharp downtrend lately, losing 7.7% last week to close at $21.23. That didn't stop call traders from taking to the semiconductor concern's options pits on Friday, where volume more than tripled the expected daily amount.

Digging deeper, more than one-third of the 59,000 calls that were exchanged did so at the January 2015 25-strike call, including a block of 15,162 contracts that crossed at the ask price of $0.67 each, just before the close. Open interest at the strike soared over the weekend, making it safe to assume new positions were initiated.

Breaking down the aforementioned block trade, the speculator laid out over $1 million for his bet (premium paid * number of contracts * 100 shares per contract). This represents his maximum risk, should AMAT shares be sitting below $25 at January 2015 options expiration. On the other hand, gains are theoretically unlimited, north of the at-expiration breakeven mark of $25.67 (strike plus premium paid).

Friday's headline trader isn't necessarily bullish, however. Given the stock's recent losses, the deep out-of-the-money status of the calls, and AMAT's high levels of short interest (i.e., 6.3% of the equity's float), it's possible this individual is a short seller seeking protection against a big move to the upside.

Part of the trader's strategy may be related to Applied Materials, Inc.'s (NASDAQ:AMAT) planned merger with Tokyo Electron Ltd., as developments like this often lend themselves to increased volatility. In fact, AMAT's losses last week may have stemmed from reports that Chinese authorities are opposed to the takeover. Just this morning, the U.S.-based company refiled an application with China's Ministry of Commerce, asking that the deal be approved.


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