Why Skyworks Stock Is a Call Buyer's Dream

Skyworks shares could be on the verge of another quick rally

Editor-in-Chief
May 24, 2017 at 11:06 AM
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As a designer and developer of semiconductor products, Skyworks Solutions Inc (NASDAQ:SWKS) was considered until recently to be a member of a vast cadre of technology operations known collectively as "Apple suppliers." But the company has begun to reap the rewards of a concerted effort to broaden its customer base. So while it is common knowledge that iPhone sales have started to plateau, SWKS has reported solid results from its partnerships with the likes of Samsung and Huawei, which provide a sizable foothold in the growing Chinese smartphone market.

While it surprised us that the resounding earnings beat reported by SWKS in late April was met with some selling (in marked contrast with the earnings-based surge in January), our view is that this represents another opportunity to accumulate positions in SWKS call options based on the ongoing technical and sentiment picture as discussed below.

It's no coincidence that we've highlighted the 20-day and 50-day moving averages on the accompanying six-month SWKS chart. The performance of SWKS this year relative to these shorter-term moving averages has been remarkable -- and enormously conducive to the establishment of bullish positions through the purchase of call options. Since Jan. 9, SWKS has not once closed below its rising 50-day moving average, and has closed on just a half-dozen occasions below its 20-day. So call option buyers have been assured this year -- to a much greater extent than is typical in this market -- that SWKS shares will trade predominantly to the upside over the relatively short time frames demanded in order for option trades to be successful.

Perhaps of even greater interest, as it relates to the timing for our recommendation of this SWKS call, is that the brief periods this year over which SWKS has traded below its 20-day moving average have represented outstanding "points of entry" on the long side. For example, SWKS closed below its 20-day (at $95.52) on March 21, and 13 trading days later the shares had rallied by 7.5% (to $102.64). SWKS next closed below its 20-day (at $95.59) on April 12 -- just ahead of a rally that peaked at $103.91 (for a gain of 6.5%) over the subsequent six trading days. To which we'd now add that the most recent close by SWKS below its 20-day (at $100.55) occurred just this past Wednesday. And while there is no guarantee of another such quick 6-7% gain, we consider this SWKS call position entry to be potentially quite timely.

Overlaid on this short-term consistency to the upside is some equally remarkable longer-term consistency. For a period encompassing 2016's fourth quarter (plus the first part of January 2017), the year-over-year gains in SWKS share prices deviated very little from the 20% level. But after the much-heralded January 2017 earnings report, year-over-year gains have steadily increased from about 40% to the current level of 60%. Furthermore, this feat has been accomplished under conditions of steadily declining share volatility. In fact, realized volatility for SWKS has been cut in half over the past 15 months, from the 40% annual rate that prevailed for most of the first quarter of 2016 to the current level of about 20%.

Those who sell "naked put options" are generally very pleased when share volatility is slashed by 50% over a period of flat to slightly higher stock prices. But when such a volatility implosion accompanies annualized share price gains in excess of 50%, call option buyers can benefit from enormous gains -- as their cost (in terms of option premium level) steadily declines, even as share price appreciation is accelerating.

Based on this impressive combination of strong price action and ever-cheapening option premium levels, one would think open interest in SWKS call options would now be at runaway high levels as more players become "woke" to the ongoing attractiveness of the "buy SWKS calls" strategy -- but one would be very wrong. In fact (per Trade-Alert), current SWKS call open interest of 49,442 contracts is lower than 85% of such readings over the past year, and is less than a third of the 12-month peak in call open interest of 160,791 contacts (reached in October 2016). And as full-throated contrarians, we greatly approve of this evidence of option speculator skepticism as carrying demonstrably bullish implications for further upside in the shares (at some point to be fueled by additional call accumulation).

Our recommended SWKS call option would achieve its target profit of 200% on a rally by SWKS into the low-120s -- the upper end of the potential overhead resistance levels as listed on our chart. And we view the chances for such a robust rally (over the recommended holding period) as significantly more elevated than are the collective opinions as expressed by the actions of "the trading crowd."

swks daily price chart sm 0521


Subscribers to Schaeffer's Weekend Player options recommendation service received this SWKS commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters -- straight from Bernie's trading desk. Learn more about why Weekend Player is one of our most popular options trading services.

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