Fear is a powerful emotion. Fear of missing out might even be more potent.
Case in point: the rally in chips.
The immediate impulse might be to jump in. If you’re in that camp, a more measured approach might be to use options and risk less capital.
Chipmaker Applied Materials offers an interesting opportunity. The company reports earnings on Thursday. For investors looking to express a bullish view while avoiding the capital commitment and downside exposure of outright equity ownership, the June 400/480 in-the-money call spread offers an attractive alternative to long stock.
By purchasing the “in-the-money” June 400 call, which is well below Friday’s closing price of $435.44, and simultaneously selling the “out-of-the-money” June 480 call against it, the resulting spread contains little “extrinsic” premium, meaning the position behaves similarly to stock, offers clearly defined risk, and has little or no “theta” or decay over time.
The call spread participates in roughly a 10% move higher (or lower) in the underlying shares, with risk limited to the net debit paid for the spread, or about $35.50 as of Friday’s closing prices. This reduces the substantial downside associated with owning 100 shares of the stock outright and, compared to purchasing shares directly, the trade also requires materially less capital while still maintaining strong directional exposure.
Only three quarters ago, the shares fell by more than 14% following earnings, a reminder that even a good story can have unpleasant interruptions.
The trade
Earnings growth has accelerated over the past several quarters. Importantly, guidance trends have remained constructive, with management continuing to signal confidence in both near-term execution and longer-duration growth drivers. Analysts have steadily revised estimates higher, reflecting improving visibility into future cash flows and expanding profit margins.
Technically, the setup also remains compelling. The stock remains above its rising 150-day moving average. Relative strength versus both the broader market and sector peers continues to improve, indicating ongoing leadership characteristics.
Applied Materials, YTD
Volume trends also support the move higher, with accumulation days consistently outweighing distribution sessions in recent weeks. Only Bollinger bands, Keltner channels, or stochastic oscillators are signaling some alarm, suggesting the stock may be at the upper end of their respective channels, which also supports that a defined-risk strategy may be superior to an outright long position in the underlying.
The primary bear case centers on valuation. Shares currently trade well above their historical average earnings multiple, at 33x forward versus a 5-year average of 23x. When expectations embedded in the stock are elevated, any deceleration in growth, margin compression, or softer forward guidance could trigger multiple contractions.
In addition, crowded positioning may amplify volatility if broader market sentiment weakens or if investors rotate away from high-multiple growth names.
Again, this supports the defined risk of a call spread rather than an outright stock purchase. (Holders of the shares may consider a 400/480 “collar” to establish similar risk/reward characteristics to the call spread, but be sure to check with a tax professional about the implications.)
Even so, for bullish investors seeking defined risk and efficient upside participation, the June 400/480 call spread offers a disciplined way to position for continued strength while avoiding the full downside exposure of long stock ownership. The stock is up 71% year to date amid a massive surge in chip stocks.
