Trade Alert: Write Now for Western Digital (WDC)
According to my IDEAL stock rating system, no stock in the S&P 500 is more oversold right now than Western Digital (NasdaqGS: WDC). After peaking above $106 in March, its share price has steadily declined over the past seven months to below $60.
Some of that decline is warranted given the company’s reliance on NAND memory devices for much of its profitability. NAND prices are expected to fall through the middle of next year, narrowing profit margins for WDC and its competitors.
However, now priced at less than five times forward earnings, WDC is grossly undervalued. To justify its current share price, Western Digital would have to post flat earnings for the next three years.
That’s highly unlikely given the cyclical nature of the memory device market. As more smartphones and other portable computing devices incorporate 3D/AR/VR apps, demand for flash memory (including NAND) is projected to grow 35 – 45% annually over the next seven years.
Western Digital is scheduled to release its Q3 results on October 25, which I expect will be less pessimistic than its recent share price would suggest. However, that overblown pessimism is why we can write a put that is more than 10% out-of-the-money and expires in three months with an option premium yield of 3.5%.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the January 18, 2019, $50 put option on Western Digital (NasdaqGS: WDC).
- Symbol: WDC190118P00050000
- Limit Order Price: a credit of $1.75 or more.
Tell your broker: “I want to sell a put on Western Digital stock. Specifically, I want to ‘sell to open’ one $50 Put that expires on January 18 for a credit of $1.75 per share or more.”
Note: Sell one put for every 100 shares of Western Digital stock you would be pleased to buy at $50 per share. Investors should set aside $5,000 per contract sold to buy the stock in case the option expires in the money.
Further Instructions Regarding the Trade:
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- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least equal to the Limit Order Price specified above.
- Place your limit order on a “good ’til canceled” (GTC) basis and be patient.
Stock Talk
Victor
Filled @ 1.75 NC
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George McMillion
Filled at $1.74 on TOS
Thank you, Jim
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MarkS
Filled at $1.90 nc on Fidelity.
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Ken L
Filled at $1.86 at Fidelity
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C.B. Cessna
WDC filled on TOS @ 1.88
Thank You Jim
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Mark F
WDC filled @ 1.90.
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Glenn
Filled WDC at $1.90
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Jeffrey J
Filled @ $1.89 at TradeStation.
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Stanley
WDC filled on 7/5 1.90 cr @ Fidelity
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W Burton
filled at $1.97 w/Fidelity on 101/8
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Greatcarp
WDC filled @ Schwab $2.20
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Curtis
Hi Jim, Should we expect an update to the portfolio showing the position fill price soon? Thanks, Curt
Jim Pearce
I just updated the portfolio table for WDC and HOG, along with today’s closing trades for GE, XRX and HRB. Should show up online by tomorrow, but I’ll double check to make sure they are visible. Thanks for reminding me.
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VSmith
WDC filled at Fidelity $2.40 at market open 10/10/18
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Narendra Shah
WDC filled @Fidelity @$1.00 , Jan 18, 45 PUT
This is my first trade from your guidence. On Training.
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Newell Arvin
I’m new to the party & just got cleared to trade Options w/SCHWAB. Looks like I made a couple mistakes already by buying BUY & WDC last week (no Calls or Puts).
Question: can I still get in on some of the action w/the seven Option plays?
i.e. AEP w/Expire Date of 11/16/18 Sell Put $70
Thanks Jim.
Jim Pearce
As a general rule, we don’t advise executing short put trades within a month of expiration. In the specific case of AEP, that option is now trading well below our limit price so it is not executable within our guidance. I will be issuing three new short put trades this Friday, so I suggest you wait for those rather than try to execute older trades with less time remaining on them.
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Newell Arvin
Appreciate the heads up Jim!
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Jeffrey Y
Hi Jim, what’s your view on WDC? The stock price kept falling since the end of Nov, and now it was further down by another 5% last night. Is the company still doing well? It is likely to get assigned before the option expiry.
Jim Pearce
Hi Jeffrey. WDC dropped yesterday after Micron released quarterly results (that were decent) but downgraded its earnings forecast: https://www.thestreet.com/investing/earnings/micron-plunges-after-earnings-forecast-sparks-memory-demand-concerns-14815415?puc=yahoo&cm_ven=YAHOO&yptr=yahoo. However, WDC is now valued at less than 5 times forward earnings, which have already been revised downward. I don’t know how much lower it can go, but I feel WDC has become grossly oversold and will rebound sharply in 2019 when its actual results exceed analysts’ dismal forecasts. https://www.investingdaily.com/personal-finance/articles/44908/five-oversold-stocks-to-own-in-2019/
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George McMillion
Was assigned 5 Contracts on WDC as expected. Didn’t want to close out the position at a loss so will keep WDC in portfolio and possibly sell Call.
Anyone else have comment or ideas?
Thanks, George
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George McMillion
As already noted I was assigned 5 WDC contracts. On Jan. 22 I bought another 500 shares
at $37.70 bringing my average cost down to $43.85. WDC is trading at $44.08 this morning.
Planning to keep shares and possibly add an Option trade.
Jim Pearce
That takes guts, but it’s how to leverage a temporary price distortion to back in the black. Good work!
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