Stock Options To The Rescue! Skyworks Solutions (SWKS)
Today we’re going to look at Skyworks Solutions (SWKS) and how you can use options to reduce your risk, lock in profits, and give you upside potential.
Here’s what happened…
SWKS reported quarterly earnings last week. Revenue and earnings growth were in line with expectations. But their better than expected 2nd quarter outlook sent the stock soaring 11% from $21.56 to around $24 today.
Here’s the deal…
Skyworks makes high performance analog semiconductors that are widely used in today’s cutting edge smartphones and tablets.
Last quarter, SWKS’s revenue increased $60 million over the same quarter last year. The increase was a 15% jump year over year. Over the same time, EPS increased from 51 cents to 55 cents.
Management also indicated they expect second quarter revenue to reach $420 million. The forecast was well above the $415 million analysts were expecting.
Here’s the kicker…
SWKS makes the majority of their money selling components to Apple and Samsung for use in their smartphones and tablets. And it’s no secret that Apple’s (AAPL) stock has been under siege lately. The stock is down a whopping 36% from the all-time high over $700 to around $445 today.
Needless to say, it’s a bit surprising to see SWKS’ stock soar when AAPL’s sales trends aren’t living up to expectations.
SWKS’ solid 1st quarter clearly demonstrates they’re not solely dependent on AAPL to generate revenue and earnings growth. But don’t be fooled, if smartphone sales growth doesn’t live up to expectations, it will have a negative impact on SWKS.
In other words, if investors are willing to question AAPL’s growth, it wouldn’t be a big jump for them to begin questioning SWKS’ future growth either.
Here’s what to do now…
Let’s assume you invested $2,000 to buy 100 shares of SWKS when it was trading for $20 per share toward the end of 2012. At a recent price of $24 per share, you’re sitting on a solid 20% profit.
This trade is obviously working out great so far. But with the uncertainty surrounding their biggest customer, it’s a tough decision whether to sell now or continue holding for more upside.
Selling your SWKS stock and buying the SWKS May 2013 $24 call option for $1.90 is a great way to lock in profits, reduce your risk, and give you upside potential if SWKS continues to move higher.
Right now you can sell your SWKS stock for a $4.00 per share profit. That’s a $400 profit on your initial $2,000 SWKS investment you made at the end of 2012.
Buying the SWKS May 2013 $24 call option for $1.90 will cost you $190. In essence, you’re giving up a portion of your profits in order to lock in a $210 profit on SWKS today, but still have the ability to profit from further upside in the stock.
That’s still a solid 10.5% profit on your original investment. That’s now your worst case scenario. No matter what happens to SWKS from here, you’ve guaranteed yourself a 10.5% profit.
What’s more, the call option gives you the ability to increase those profits.
The breakeven on the call option is $25.90 ($24 strike price plus the $1.90 option premium). If SWKS is at exactly $25.90 when the option expires in May, you’ll get back your $190 investment. Your return on investment will be back to 20% as if you just sold the stock today.
But if SWKS rallies beyond $25.90, your total profits will be more than if you just walked away today. In fact, if SWKS makes it back to the 52-week high of $31.78 when the option expires, your total return on investment will skyrocket to $988 or nearly 50%!
As you can see, replacing your SWKS stock holdings with a call option allows you to lock in profits, reduce your risk, and still gives you upside if the stock continues to rally.
Good Investing,
Corey Williams
Category: Options Trading
