Some notes on STEC...

On 11-5-2009 I initated 5 short puts on STEC at the $12.50 strike price with Jan '11 expiry. I like the prospects of this company and think that it was unfairly sold off after reaching a 52 week high of $42.50 a share on 9-29-2009. The big sell off was caused when EMC one of the comany's largest customers reported that it had ordered to much product which gave question to the earnings exspectations of STEC; and also when litigation against STEC by sharelholders from a secondary offering said that top execs may have gave false and misleading statments that caused an artificially high price. Basically a lot of investors who bought in to the 9 million secondary offering near the highs lost a lot of money and they are pist off.

Why I like this position:

1 - it is currently trading at a p/e of 12 which is very low for a tech company. Tech companies usually trade at p/e's of 20-30 or higher beause of the growth potential.
2 - With current earnings estimates at $1.90 a share for 2010, this puts a foward p/e of just 6 on STEC. Even at the low end of P/E's for tech stocks at a multiple of 20, puts the a value of at least $38 ($1.9 x 20) on STEC stock.
3 - There is high institutional ownership at 37%. This puts the motives of the execs inline with thoses of shareholders, as they have a lot to gain or loose depending on the performance of the company.
4 - It has zero debt!
5 - I think that the recent sell off presents a great opportunity to enter a position in the stock.

What do the probablities look like?



In the future I may comment on the interpretation of the risk/reward calcutions. I don't really agree 100% with what is being calculated in the above analysis. But "theoretically" it is all correct. Be we all know how the theorectically can play out in reality!

What do I see on the Charts:

I don't really see anything technical that has made for a strong argument in my favor for this position. Rather I see value in the recent sell off. I think the charts are presenting an opportunity to enter what will be a very lucrative position.



UPDATE: Below are the results of tweeks to variables in the option pricing model that I mentioned in the comment.




Updated Chart

Update: 12/28/09

Pay particular attention to the volume behind the upmove. It traded half of its average daily volume in about 30 minutes. Look for shorts to get trapped and forced to cover on the way up. We are still targeting a move up to about $20. Would be normal to see a pullback or a few consolidation days before it continues the move higher.

I was also looking at implied volatility and the greeks. Today IV has shot up about 10% which has caused my position to lose premium at a slower rate. But I am paying particular attention to the greek vega as this measures how much the contract will move with a point change in IV. Currently it is .05 meaning that every contract that I have will lose $5 of premium value for every 1 point drop in IV. On 5 contracts that gives the total position a Vega of $25 meaning that every point to the downside on IV makes the premium $25 less. This would put me in the money an additional $250 on top of the $600 I am already up on the position. I anticipate that volatility will come in when the stock is ready to rest. It is interesting nonetheless to see volatility rise as price goes up as usually there is an inverse relationship.