Probably an embarrassing thing to admit, but I *do* have memories of a calculator when I was growing up. In high school, we needed to have a graphing calculator and it wasn’t long before we realized we could load (basic) games on it and waste time rather than paying attention in class. The calculator of choice, of course, was by Texas Instruments (Ticker: TXN). My first was a hand-me-down TI-82, and I later upgraded to the luxurious (in those days) TI-89 when I went off to college. It played even better games …
While I associate Texas Instruments with their calculators, that portion of their business is relatively small – buried in their “Other” product categories. TXN is a semiconductor design and manufacturing company. Semiconductors accounted for about 69% of their profit in 2019, embedded processors about 22% and other about 9%.
This week, we look at a bullish play in TXN:
- Want shares for the long term? Sell a cash secured put: August 21st 120 put for 1.22
- Want a trade? Sell a put spread: Sell the August 21st 120 put and buy the 115 call for 0.60 net credit
- Prices are at the midpoint as of 7/31/2020
- All trades are for educational purposes and do not constitute financial advice.
Wall Street expected 0.88 in earnings recently and TXN came in at 1.48. TXN then sold off… A reminder that post earnings performance is never ‘obvious’! With TXN down, one can sell a put and take ownership of shares “on sale” if it continues to fall for the next three weeks.
TXN pays a solid dividend of $3.60 on an annual basis, up from 1.40 in 2015. I expect it will continue to increase over time. If we are assigned at 120, we’ll receive a 3% yield on our shares. This coupled with selling covered calls on the position could net a nice return while waiting for the shares to rebound.
If we aren’t assigned, we’ll receive a bit over a 1% return on our risk (1.22/118.78). Total risk is defined as TXN going bankrupt and its shares becoming worthless ($0). With portfolio margin, there is a buying power impact of about $1115.
For the put spreads, we are risking $440 to make $60. If it expires worthless our return on risk will therefore be 13.6%.
Why else do we like this trade?
IV has come down since earnings, but it has remained well above historical volatility. If you review IV and HV for even longer, you’ll see that the IV is actually near the pre-COVID high end of the range as well.
Earnings are behind us and the dividend was just paid, so there are no near term events in the underlying.
What can go wrong?
The market or the stock could tank. The stock is pricing in a $6.88 move by expiration, which if it is to the downside, would be Above our short strike. Still, this is an Estimate and the stock could drop much more. We’ll lose money below 118.78 at expiration for the short put or below 119.40 on the put spread.
The market overall could drop due to COVID-19 or one of many other macro events. As always, we place trades within our risk guidelines knowing that almost anything can happen.
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