The shares lost 24.5% over 399 days, or a -22% annual rate. The position -- shares, options hedge and dividends -- produced a 29.0% loss on debit, for a -145% annual rate.
Update 11/3/2014: I've closed my bearish hedge after the price of the underlying stock closed the month above its 12-month moving average. As is my practice, I'll put off calculating profit and loss until after the entire position is unwound.
Update 10/10/2014: SNDK has closed below its 55-day price channel and I've opened a bear hedge on my longer-term bull position, structuring it as a bear call spread, short the $90 calls and long the $92.50 calls, and expiring Nov. 21. At expiration, if SNDK still remains hedgeable under my rules, I'll roll the hedge forward.
Click on chart to enlarge.
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| SNDK 90 days 4-hour bars |
Update 5/6/2014: I've opened a long-term bull position in SNDK, structuring it as long shares. Under my rules, the position can't be closed until May 7, 2015.
I intend to open a long-term position in SanDisk Corp. (SNDK), which has closed above the 12-month moving average each month since December 2012.
In addition to upside momentum, the stock has a bullish rating on the fundamentals and pays a small quarterly dividend.
The Chart
Elliott wave analysis places SNDK in the middle wave of a rise from July 30, 2013 starting from $53.09. Once the present third wave is complete, SNDK will correct the rise from $64.50 that began Dec. 12, 2013, then push up to new highs as a fifth wave, which will at its end correct the rise from $53.09.
The chart presently shows SNDK in wave 3 {+2} of 5 {+3} of 3 {+4} to the upside.
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| SNDK 19 years monthly bars (left), 2 years daily bars (right) |
Options are pricing in confidence that 68.2% of trades will fall between $62 and $109.96 over the next year, for a potential gain or loss of 27.9%. The lower boundary of the implied volatility range falls within wave 1 {+2} of 5 {+3} in the uptrend that began July 30.
The level at which I would begin hedging my position with bearish options spreads currently stands at $73.11.
The Company
SanDisk, headquartered in Milpitas, California, makes data storage products. Perhaps their name is most associated in the public mind with the little thumb drives containing flash memory that people use with their USB ports to load and offload files.
Those devices, however, are a small part of their business, accounting for only 1% or so of their market cap. Solid-state drive memory and flash memory cards account for 51% of market. The latter categories are far broader than USB port devices and so gives SanDisk a less tech-limited sandbox to play in.
Analysts come in perfectly neutral in their expectations for SanDisk's future, with an enthusiasm index of zero. The forecasting firm Zacks, however, gives SanDisk a bullish rating.
SanDisk reports return on equity of 19%, with debt amounting to 16% of equity.
Earnings tend to peak in the 4th quarter, and that period's earnings have risen consistently compared to the year-ago period since the 4th quarter of 2012.
SanDisk has surprised to the upside 11 times in the past three years, and to the downside once, back in 2012.
The company's earnings yield is 5.63%, compared to 2.59% on 10-year Treasury notes. The earnings yield is comparable to that of other computer storage device companies.
The quarterly dividend yields 1.05% annualized at today's prices, or nearly 20% of the earnings yield.
The stock is selling for nearly 18 times earnings, and also goes for a premium over sales. It takes $3.06 in shares to control a dollar in sales.
Institutions own 89% of shares.
SanDisk next reports earnings on July 14. The stock goes ex-dividend sometime in August for a quarterly payout of 22.5 cents a share.
Liquidity
SNDK on average trades 3 million shares a day and supports a wide selection of option strike prices spaced $2.50 apart near the money.
The front-month at-the-money bid/ask spread on puts is 2.3%, compared to 0.3% for the exchange-traded fund SPY, the most traded symbol on the U.S. markets.
Implied volatility stands at 28%, compared to 14% for the S&P 500. Volatility has been zig-zagging in a sideways pattern since it fell sharply from 17% on April 11.
Contracts are trading normally today, with a slight skewing to the bull side. Calls are running 18% above their five-day average volume and puts are at 99% of average.
Decision for My Account
I shall open a long-term bull position in SNDK, structuring it as long shares, with the intent of holding it for at least a year while managing downturns by using options as hedges according to my long-term trading rules.
The company's own options are liquid enough for use as hedges.
References
My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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