Korean semiconductor manufacturer Magnachip Semiconductor Corporation (MX) has slid 42% in the past year, far underperforming the chip space. One trader sees further downside for shares in the next five months.
That’s based on the September $5.00 puts. With 163 days until expiration, 5,001 contracts traded compared to a prior open interest of 125, for a 40-fold rise in volume on the trade. The buyer of the puts paid $0.45 to make the bearish bet.
Magnachip shares recently traded for about $5.35, meaning they would need to drop about 8% for the option to move in-the-money. Shares are right near their 52-week low of $5.18.
Besides the massive price drop, Magnachip had an unprofitable year, with revenues sliding 17%.
While shares look inexpensive with a price-to-sales ratio of just under 1, and at a 40% discount to book value, the downtrend looks likely to continue.
Action to take: Investors should avoid shares for now.
Magnachip shares have been trending down steadily since last June, and has recently broken to new lows. The slow speed of the decline is not setting up the stock for an oversold rally quite yet.
For traders, the September $5 puts have enough time to play out for the option to move in-the-money. That could mean high double-digit returns or better on the options trade.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.