Company Description

SanDisk (SNDK) is a leading manufacturer of flash storage card products used in consumer electronics. Products include USB Drivers, digital audio players and flash cards and drives. SanDisk was founded in 1988 and is headquartered in California.

Key Statistics

 

 

Fundamental Picture

The Bulls

On the surface the numbers at SanDisk do appear compelling when looking at the above statistics, as well as such items as operating margins of 22% and a clean looking balance sheet. In fact, the stock has graced the IBD100 list during much of 2005 and 2006 (currently removed) and maintains a favorable VST (Value / Safety / Timing) ranking at VectorVest.

The Bears
Is flash memory being commoditized? That’s a question some investors are asking themselves. The concern is whether the product will begin to resemble DRAM chips, which is considered a very volatile and price sensitive market. Further, a recent article in Barron’s concluded that while SanDisk will be attempting to sell a lot more flash memory in 2007, competition will become fiercer and players such as SanDisk will need to access new markets to unload inventories and keep those numbers looking bovine and kind.  

Technical Picture

 

 

Figure 1: SanDisk (SNDK) 1.5-Month Ascending Base

Technical Description

While there appear to be fundamental arguments from both camps (what’s new), the technical picture does look to be directionally bovine and kind at the current time. In fact, if one had the luxury of viewing stock patterns in a vacuum, the daily view above, which shows an ascending base or triangle, would be seen as a bullish formation. However, with the fact that the tech-heavy Naz’ has corrected 8% in recent days (and weeks) and despite grumblings from the bears about SanDisk’s fundamentals, the stock has developed a bullish pattern. Relative strength and contrarians may see this as secondary confirmation that the ‘coiled spring’ pattern will lead to an upside resolution.

The current consolidation is also finding support from Elliott Wave 4 EBOT triggers that triggered back in March. That evidence suggests much higher prices in the months ahead, as well as the near-term TAPP evidence shown above. I’ve labeled an area from roughly 70 – 75 as being the next area of technical importance. This is based on an approximate 5 point triangle measured move (conservative) above resistance (light blue area 60 – 65) and SanDisk’s 62% and 78% retracement levels from its early 2006 highs. Finally, after one false breakout, the stock’s most recent determination to defy a broad-based sell-off has resulted in a tight weekly consolidation within the larger angular base near angular supports, which is the basis for this week’s option case study.

Optionable Strategy

 

 

Figure 2: June OTM Call

In a market where premiums have escalated to relative extremes, SanDisk is a bit of an anomaly. While consolidations do typically lend themselves to a reduction in the price paid for a Call or a Put; based on the stock’s historic volatility (90 day), the front month June options with 28 days left until expiration are very affordable. While purchasing front month premium might be seen as being the bane of delta neutral strategists, for the directional trader interested in the current technical evidence, these calls are more than reasonably priced and do afford very real protection in a stock known for sharp moves.

With that said, the June 65 Calls listed above appear to be a very good value. Bullish consolidation patterns can be approached in a multitude of ways and SanDisk is no exception. One strategy and the simplest would be to purchase the Call at the current levels and use a technical and / or money management based stop loss. With Friday’s action triggering out of a two day consolidation and testing weekly highs, this entry might be seen as a blend of anticipating the action ahead and still being somewhat close to supports, as well as having accessibility to the options while the stock is still ‘officially quiet.’

Traders deciding upon this type of trade might use a 5% stop loss at 59.35. That line in the sand would put the stock below technical supports, but lend itself to an extra bit of wiggle room and more importantly keep losses to a minimum. On the plus side, at a 1.60 of premium, SanDisk would only need to retest the triangle highs to enable a double in price wherein strategists could establish a free trade (selling half) or look to offset risk by putting on a vertical. Those are but two possible ideas for maintaining a profitable position while adhering to money management and putting the risk / reward profile further in our favor.

Another alternative would be to wait for clearance of the 63 level. The downside to using this method is that it could be prone to not getting an easy fill that keeps the premium paid to an equitable amount. One suggestion for traders wanting that extra bit of confirmation out of the 5-Day Breakout would be to use a level slightly higher trigger level (than typical) and price the calls accordingly, with a limit price in mind. For instance, if 63.35 were used, the Calls should be trading for somewhere around $2 per contract. Traders could enter an order using a stop limit based on that price with a top (limit) of 2.10. While some might see the technical clearance as a definitive reason to get long and a reason to use a market order, the interpretation is that if the stock eludes an entry in the defined parameters set, then waiting patiently and monitoring for other strategies may prove to be more advantageous than in receiving a fill not to our liking. While this method will miss some trades, we’d rather be sidelined and looking for fresh opportunities than buying June 65s at a less-than-bovine and kind value and something looking more well-done than necessary.


Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.