Applied Materials Has Large Option Traders' Attention

Applied Materials, Inc. AMAT is up 60% year to date amid a broad downturn in the semiconductor industry.

With semiconductor earnings season just around the corner, Applied Materials has caught the eye of some large option traders this week.

The Trades

On Monday, Benzinga Pro subscribers received eight option alerts related to unusually large trades of Applied Materials options. Here are a handful of the biggest:

• At 9:36 a.m., a trader sold 580 Applied Materials call options with an $57.50 strike price expiring on Jan. 17, 2020 at the bid price of $1.21. The trade represented an $69,600 bearish bet.
• At 9:55 a.m, potentially the same trader bought 736 Applied Materials call options with a $48 strike price expiring on Jan. 17, 2020 near the ask price at $5.80. The trade represented a $426,880 bullish bet.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size and timing of the largest Applied Materials trade, it could easily be an institutional hedge.

More Upside Ahead?

So far in 2019, investors have shrugged off weakness in the semiconductor market, particularly when it comes to memory pricing. Last week, Taiwan Semiconductor Mfg. Co. Ltd. TSM reported better-than-expected revenue and earnings in the third quarter, potentially setting the stage for a strong earnings season from other semiconductor stocks.

However, Mizuho analyst Vijay Rakesh said earlier this month that semiconductor stocks remain exposed to China trade war risk in the near term.

Applied Materials makes equipment semiconductor stocks use to produce their chips. Up to this point, the stock has been extremely resilient to the semiconductor cyclical downturn and the trade war uncertainty.

Applied Materials is expected to report its own earnings report on or around Nov. 14.

Benzinga’s Take

Regardless of whether or not the two large trades on Monday came from the same trader, the bullish call purchase dwarfs the bearish call sale. If the two trades came from the same trader, he or she may simply be switching out a smaller, higher-risk position for a larger, lower-risk position. The $57.50 calls require another 11.7% upside to reach their break-even point. The break-even point on the $48 calls is only about 2.4% above the current share price.

The stock traded around $52.55 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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