Options Corner: Teradyne's Value Proposition Also Bodes Well For Swing Traders

With the broader technology sector enjoying a resurgence, several of the usual suspects have benefited tremendously from the momentum spike. Still, Teradyne Inc TER, a leading supplier of automated test equipment (ATE) and industrial automation solutions, has lagged its innovation-centric peers. At the same time, the potential trickle-down effect could lift TER stock, making it both a possible value investment and an intriguing trade.

Recently, the tech-oriented Nasdaq Composite eked into positive territory for the year, symbolizing the resurgence that has taken place among publicly traded innovators. Over the past 52 weeks, the index has now gained over 15%. Terdayne, though, has not shared in the enthusiasm. On a year-to-date basis, TER stock is down more than 34%. Over the past 52 weeks, it has lost nearly 41%.

Nevertheless, there's legitimate cause for optimism. Semiconductor juggernauts like Nvidia Corp NVDA and Advanced Micro Devices Inc AMD have regained their mojo in recent sessions. Part of the enthusiasm could be traced to catalysts such as the "TACO" trade, a crude acronym that stands for ‘Trump Always Chickens Out.'

Essentially, the market is digesting President Donald Trump's tariff policies and accompanying aggressive rhetoric. Initially, the tariffs sparked great concern among investors, leading to severe volatility. However, Trump has a tendency of talking tough first and then walking back the bravado. The market has noticed and is responding accordingly.

Subsequently, concerns about the impact of retaliatory measures against the tech sector has lessened somewhat. Combined with strong earnings results from the semiconductor space, the landscape appears compelling for TER stock. Fundamentally, that's because advanced chips are incredibly complex, requiring rigorous testing protocols. Since this process represents Teradyne's bread and butter, TER presents an intriguing value proposition.

It also might make for a quick trade.

A Sentiment Reversal Could Be Due For TER Stock

To be completely fair, the fundamental argument that Teradyne's behind-the-scenes relevance should boost its business was mentioned last year. As stated earlier, TER stock has lost a massive amount of equity value since that argument was issued. This goes to show how investing narratives — no matter how convincing — aren't necessarily the best predictors.

On the flipside, when it comes to the discipline of trading, predictability runs at the heart of the speculative practice. Traders aren't necessarily focused on the narratives, though they provide important context. Storylines represent the "why" of a target enterprise or asset. Traders are focused on the "how" — how much, how fast, how likely.

In other words, the central theme in options is probability: how likely is it that a particular stock will meet its profitability threshold within an allocated time period? To answer this question, traders should turn to market breadth or the assessment of patterns of accumulation and distribution.

Ordinarily, financial experts will turn to fundamental and technical analysis to aid in their decision-making process. Unfortunately, these methodologies are only partially useful because of their property of non-stationarity. That's the academic way of saying that core metrics such as earnings growth or share price generally fluctuate, especially across vast time periods and sentiment regimes.

For example, TER stock was trading around $20 a share a decade ago. It's above $82 today, meaning that statistical clustering is really only applicable for a narrow time range. In contrast, market breadth is simply demand and demand is a binary construct. Such constructs existed in 2015 and they're applicable today.

In the past two months, TER stock printed a "3-7-D" market breadth sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period. Notably, in 60.71% of cases, the following week's price action results in upside, with a median return of 5.25%. Based on Friday's close of $78.60, TER is on track to hit $82.73, which is now a very realistic target.

Should the bulls maintain control of the market, the median return for the second week stands at 2.75%. If so, that should push TER stock a hair over the $85 level.

Getting Down To Business

Using the above market intelligence, the most rational multi-leg options strategy may be the 80/85 bull call spread expiring June 20. This transaction involves buying the $80 call and simultaneously selling the $85 call, for a net debit paid of $270. Should TER stock rise through the short strike price at expiration, the maximum reward is $230, a payout of over 85%.

Primarily, what makes this trade attractive is the implied shift in sentiment. In any given week, the chance that a long position in TER stock will be profitable is 54.04%. As it stands, bullish traders have a modest edge. Coming off the back of the 3-7-D sequence, these traders enjoy an extra boost in probability, thus incentivizing a debit-based strategy.