Earlier this week, Texas Instruments TXN narrowed its second-quarter earnings guidance, lifting the lower end of its range to 60 cents per share from 56 cents. The expected range is now 60 to 64 cents per share, compared to analysts’ estimates of 61 cents. The company’s earnings are expected on or around July 20.
In reaction to this news, Brigantine upgraded its rating on the shares to “buy” from “hold” and set a 12-month price target of $30. The firm estimated that even if TXN revenue is flat for the latter half of 2010, year-over-year sales would grow 30%.
In separate news, Davenport recommended TXN as a “purchase,” noting the company could benefit from a widespread global economic recovery, which trickles down into increased business spending. Davenport noted that TXN is attractively valued, with a price-to-earnings (P/E) ratio of 10 times its fiscal 2010 operating earnings per share estimate.
Technically speaking, TXN has been consolidating sideways between the 23 and 27 levels for nearly a year. Investors who believe, as the analysts at Davenport and Brigantine do, that upside in the share price is ahead, could consider option strategies in lieu of buying the shares outright. For those who think TXN is likely to stay within its range, a neutral option strategy may have more potential than simply “holding” the shares. Two hypothetical option strategies on TXN – one bullish, one neutral – are described below. Remember these serve as examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.
Want to learn more about different options strategies or the OptionsHouse platform? Stop by our events page to review our schedule of free weekly webinars and sign up for one that interests you. Next week’s Tuesday strategy webinar is a look at the short-call strategy.
*Prices given as of Thursday afternoon. TXN was trading at $24.47
Bullish Option Strategy: Long Call
Investors who are hopping on the TXN bandwagon could use the simple long-call strategy to act on their bullish thesis. The January 21 calls are currently priced for $4.70, which is the maximum the investor can lose if the stock fails to rally. If TXN moves above the breakeven price ($25.70 at expiration), gains are theoretically unlimited with a long call position.
Neutral Option Strategy: Iron Condor
Expect TXN to continue trending sideways in the near term? An iron condor strategy may be something to consider. A July-dated iron condor can be constructed with the following legs:
• Short the July 23 put
• Go long the July 22 put
• Short the July 25 call
• Go long the July 26 call
The net credit from this four-legged trade (which is the equivalent of a bear call spread and a bull put spread) is 50 cents. If the stock is trading between the two short strikes (23 and 25) when these options expire on July 16, the investor keeps the full credit collected as the maximum potential profit. The maximum the investor can lose is also 50 cents, or the difference between the call (or put) strikes minus the credit. Breakevens for this strategy are $22.50 to the downside and $25.50 to the upside.
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