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Incremental Advancements Can Lead to Big Gains

Incremental Advancements Can Lead to Big Gains

This year marks the fiftieth anniversary of the first time that man walked on the moon. When Neil Armstrong said, “That’s one small step for man, one giant leap for mankind,” he could have been referring to many things. One interpretation is that his small step was made possible by the many small steps that contributed to his success.

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  • The Apollo missions are an excellent example of how small things can add up to great advances. The missions were built on great advances in science, but each advance was itself a series of smaller steps. We have seen that pattern throughout history, and it continues to unfold.

    That pattern could be unfolding in self driving cars which will require thousands of small advances to take a giant leap.

    Texas Instruments Moves Forward

    Texas Instruments Incorporated (Nasdaq: TXN) designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide.

    The company recently took the wraps off a buck converter, which it claims to be the industry’s 100-V input, wide-input-voltage (VIN) synchronous DC/DC buck converter.

    These converters extend battery life in rugged applications pertaining to various markets like industrial and automotive. The company’s presence in these markets will further be strengthened owing to these converters.

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    These converters are designed to maximize power delivery in very small packages.

    The 100-V, 1-A LM5164 voltage converter takes very less space as they are more than 10% smaller than the offerings currently available in the market. In addition, the new converter enables simpler and faster power conversion design. It can operate from a wide input voltage of 6 V to 100 V and delivers up to a 1-A DC load current, making it very efficient.

    The converter features constant on-time (COT) control architecture, as well as integrates high and low side power MOSFETs. The company also unveiled an automotive-grade converter, LM5164-Q1.

    As the company continues to leverage its expertise in industrial and auto products, as well as systems to launch compelling products for different markets like analog and embedded, we believe that the move is intended to boost TI’s top-line growth.

    The move highlights Texas Instruments’ R&D investments in several high-margin, as well as high-growth areas of analog and embedded segments. The company is gradually increasing exposure in industrial and automotive markets, as well as dollar content at customers, while reducing exposure to volatile consumer/computing markets.

    It has been integrating different functionalities into single devices, as well as encouraging customers to opt for simpler, more power efficient and smaller form factor products that may potentially lower the cost of ownership and might be used in the smallest of applications.

    This increases its dollar content per device, helping in share gains and margin expansion. Tough competition from the likes of Broadcom, Analog Devices and Intel is also fended off as a result of the same.

    This Could Boost the Stock

    It could take just a small new advance to push TXN out of the trading range that has been in place for more than a year.

    TXN weekly chart

    The short-term chart shows that TXN also broke out of a small trading range and could now be set up for a quick move higher.

    TXN daily chart

    Trading the Trend

    When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

    Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up-trend.

    bull put spread chart

    Source: The Options Industry Council

    This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

    Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.

    Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

    A Specific Trade for TXN

    Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For TXN, a bull put spread could be opened with the April 18 put options. This trade can be opened by selling the April 18 $105 put option for about $0.95 and buying the April 18 $115 put for about $5.80.

    This trade would result in a credit of $4.85, or $485 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

    The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $10 ($115 – $105). This is multiplied by 100 since each contract covers 100 shares.

    Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $515 ($1,000 – $485).

    The potential gain is about 94% of the amount of capital risked. This trade will be open for a relatively short amount of time and the annualized rate of return provides a significant gain.

    The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

    For more information on options click here for our free guide, The Ultimate Guide to Options Trading.

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