Options Corner: The Smart Money Recently Signaled A Floor In Applied Materials

As a common-sense rule, investors should avoid making wholesale decisions based on a single informational source.

Still, if one had to make such a choice, it would be most practical to follow the smart money trail. That's the opportunity potentially available in semiconductor specialist Applied Materials Inc AMAT.

Unlike so-called headline enterprises like Apple Inc AAPL or Nvidia Corp NVDA, Applied Materials represents the stagehand of the recent technological surge, which includes artificial intelligence and the proliferation of data centers. The company provides the wafer fabrication tools that are essential for AI chip production. While chipmakers have grabbed most of the attention, they couldn't operate without Applied Materials' advanced fabrication equipment.

Nevertheless, Applied Materials stock doesn't trade in a vacuum. With the Trump administration engaged in multiple trade wars and with recession fears rising, growth-oriented enterprises have struggled. AMAT has been no exception, slipping more than 5% since the beginning of the year.

At the same time, the red ink could offer forward-thinking investors with a compelling discount. First, management is making shareholder-friendly moves, recently hiking its dividend for the eighth consecutive year. Second, the leadership team greenlit a program to buy back $10 billion worth of AMAT stock over time.

What could be most convincing, though, is the smart money trail.

Unusual Options Activity Signals Upside

On Monday, Benzinga's options scanner identified unusual activity for Applied Materials stock derivatives. Since the options market often represents the playground of sophisticated investors, deciphering the underlying price action could potentially yield actionable insights.

Overall, negotiations have been tight but with a slight edge toward the optimistic side of the spectrum. Yesterday, 46% of transactions carried bullish intentions while 40% were bearish, with the remainder representing neutral wagers. Still, it's the nuances that are arguably the most intriguing.

Primarily, the most bullish transaction in terms of dollar volume was for sold $150 puts with an expiration date of June 20, 2025. Essentially, major players — likely institutional participants — are underwriting the risk that Applied Materials’ stock will not drop materially below the $150 strike price by June 20. If it does, these traders are at risk of assignment, meaning that the other side of the transaction (the put buyers) could exercise their options.

Note that the bid of the aforementioned $150 puts was $9.85. This is the premium that the put writers (sellers) received for underwriting the risk that shares of Applied Materials will not fall significantly southward. By logical deduction, the intrinsic breakeven for the put writers is $140.15. Below this point at expiration, the put writers would lose money.

Of course, options also have time or extrinsic value. Should AMAT stock fall sharply toward the breakeven threshold prior to expiration, the move would likely benefit put buyers. Therefore, retail investors reading Benzinga's options screener have good reason to believe that support should hold around $150.

Stated simply, there's too much money at risk for the sold puts to be a casual wager.

Finally, AMAT stock benefits from an upward bias. Using data since January 2019, a long position held for any given eight-week period has a 65.3% chance of rising. Under dynamic conditions, this positive probability does not materially change. For example, AMAT is currently up around 1.5% over the trailing five days. In an eight-week hold following a weekly return of up to 5%, the chances of profitability dips only slightly to 63%.

Whether following the smart money or playing the numbers game, AMAT stock appears to be offering a sensible discount.

Charting a Way Forward with Applied Materials

With a relatively high degree of confidence that Applied Materials stock will be supported at around $150 and with statistical tides generally moving the security northward, speculative investors may consider an optimistic strategy known as the bull call spread. Specifically, the 155/160 spread expiring April 11 looks intriguing for aggressive traders.

This transaction involves buying the $155 call (at a time-of-writing ask of $630) and simultaneously selling the $160 call (at a bid of $390). The proceeds from the short call partially offset the debit paid of the long call, resulting in a net cash outlay of $240, the most that can be lost in the trade.

Should Applied Materials stock hit or exceed the short strike price of $160 at expiration, the maximum reward is $260, a payout of 108.33%.

Assuming the positive scenario, a four-week position historically features a median return between 6.5% and 8%. Granted, the negative outcome could also materialize, which would negate these implied return targets. However, the sold $150 put by major players suggests that the optimistic outlook may be the likelier one; hence, the deployment of the bullish strategy.

Now Read: