KLA-Tencor Options Attractive With Volatility Down, Shares Up

As directional traders, we�re not really interested when there is equilibrium between supply and demand in the markets. We know that when demand exceeds supply, prices rise (and they fall when supply exceeds demand), and this can lead to some juicy trade setups that we can make quick profits from.

However, much of the time, prices stagnate in some type of trading range that�s often referred to as a �base.� These bases represent pauses in an overall trend where price gains (or losses) are digested until the balance of power shifts back in the favor of the bulls or bears.

When such a shift happens, it often represents a low-risk, high-reward opportunity to initiate new positions in the direction of the existing trend. Take KLA-Tencor Corp. (NASDAQ:KLAC), for instance.

This semiconductor company is in the midst of a textbook uptrend, which has formed a clean basing pattern over the past three weeks. A break above the high of the base may portend even-higher prices to come.

As prices have risen in KLAC over the past two months, implied volatility has declined noticeably. This is a function primarily of the fact that the realized volatility of KLAC has dropped over the same time frame. Lower volatility causes option prices to contract and stabilize, thus setting up an ideal environment for option buyers to capture good entry points before stocks get up and move.

At current levels, KLAC�s implied and historical volatility are right in line — making option prices seem fairly priced here. �A simple call or call-spread purchase may be the way to go. Consider the following two ideas:

1. Buy a Long Call: Buy to open the KLAC Jan 48 Call option (which is currently trading in the $3.30 area).

To reduce your entry cost, you can also buy a call option spread, by buying the recommended call option and selling a higher-strike call option against it. This caps your upside but also reduces the money you have in the trade and, thus, your risk in the markets. See below�

2. Buy a Bull-Call Spread: Buy to open the KLAC Jan 48 Call while, at the same time, selling to open the KLAC Jan 50 Call (which is currently trading at $2.30). Your cost would be the net debit of the two positions ($3.30 debit – $2.30 credit), or $1.

Source: MachTrader

At the time of this writing Tyler Craig had no positions on KLAC.