Excerpt from OTC Journal
QLogic is a storage and network technology company which dropped from $36 to $20 in the last three weeks. The stock was decimated in recent weeks when EMC, the 1200 pound gorilla in the data storage space, made pessimistic predictions about IT spending for the remainder of the year (big surpirse).
The recent gap in the chart, the space from $24.60 down to $20.95, is one reason we chose this company. This gap is like a vacuum, and nature abhors a vacuum. The stock needs to rebound to the $24.60 level to fill the gap and fill the vacuum.
QLogic is announcing earnings on Wednesday, October 16th after the close. Analysts expect the company to announce $.26 per share in earnings on sales of $105 million. This would be up from $.19 per share in earnings the same quarter one year ago. If estimates are accurate, this company's profits are growing in a very hostile climate.
The company has not warned of any expected short fall, so it is reasonable to assume they will hit or moderately exceed this number. If this is the case, and the market climate is still favorable, the stock will probably rebound nicely into the $24.50 range and possibly to the mid point of its recent decline, or about $28.
For those high risk oriented traders who want to gamble with less capital, you might look at the options instead of the common stock. You will pay a fairly high premium for the leverage, but the percentage returns will be much greater if the idea works. The November 20 Calls closed at $3.80 (symbol QLQKD) Friday, and the November 22.50 Calls closed at $2.50 (symbol QLQKX).
Each contract represents an option to own one hundred shares. Therefore, the purchase of 10 contracts represents ownership of 1000 shares. In order to purchase 10 of the November 20 calls based on Friday's closing price, you would have to invest $3800. Over the next several weeks, this option will nearly track the common stock point for point. If the common stock goes up $4, the option will probably go up about $3.50.
With the stock at $22, a $4 move equates to a 18% gain. However, for the option at $3.50, a $4 move equates to a 115% gain. Hence, the leverage of options. Bear in mind, options are very risky, and you should not invest more than you can afford to lose.
There are many options trading strategies- some highly risky and some conservative, but that's a subject for another newsletter.
If you decide to invest, please use a stop loss at whatever risk tolerance is. If you feel you can afford to lose 10%, set your mental stop loss accordingly and just sell if it gets there. Be disciplined.