Apple Can Go With This Or They Can Go With GTAT

August 20, 2014 12:17 PM

GT Advanced Technologies (GTAT) has caught the iPhone 6 fever. The supplier of Sapphire, the material that goes into LED screens is expected to someday displace Corning’s (GLW) Gorilla Glass in new larger iPhone(s) and maybe iWatch. The stock is up 105% year to date as investors expect the company’s manufacturing partnership with Apple to yield massive supply/demand opportunities. In fact, analysts have back-end loaded 2014 sales in anticipation of GTAT being a main supplier.  In the first two quarters of this year, GTAT booked $80 million in sales, and analysts expect them to book $143 million in the current quarter and $407 million in Q4.  The risk to the story at this point is that GTAT is NOT the exclusive supplier to Apple, or that sapphire will not be used in the new phone’s screen at all. (it is currently used in small quantities on the camera and thumb button.)

This morning, the GTAT analyst at the brokerage firm CLSA (who has been a long time bull) downgraded the stock from Buy to Sell as it appears they potentially see lower yields in their almost completed manufacturing facility in Arizona.  That bottleneck is hurting supply and spiking costs.  Given the stock’s run, they see risks balanced at current levels given the uncertainty of just how much GTAT’s sapphire will be in soon-to-be-announced Apple devices.

Options traders are not messing around in this one.  The iPhone 6 is set to debut for sale on Friday Sept 19th, which also happens to be Sept expiration, and the at-the-money $18 strike straddle in Sept (the put plus the call) is offered at $3.10.  If you bought that, you would need a move above $21.10 or below $14.90 to break even, or about 17% in either direction.

The chart below of the 30 day at-the-money Implied Vol shows the recent bid in options prices.  While IV looks to be in the mid point of the 52 week range, I would say with a 7 handle of on IV, long premium strategies have very little room for error:

GTAT 1 year chart of 30 day at the money IV from Bloomberg

GTAT 1 year chart of 30 day at the money IV from Bloomberg

From a technical perspective, the 18 month shows the dramatic ramp, but also the rangebound action for the last 6 months between 14 and 20:

GTAT 1yr chart from Bloomberg

GTAT 1yr chart from Bloomberg

It is interesting to note that the implied move for any actual acknowledgement of a contract is likely around 10% as the options will decay a good bit between now and Sept expiration.  It’s also interesting that the break-even on the downside for the at-the-money straddle is at technical support near the 2 prior lows and also the 200 day moving average.  On the upside, resistance is not as clear, as the stock has short interest of about 37%, and if the contribution is above what analysts expect, the stock had NO overhead resistance.

It’s very likely that the new screens are not sapphire and the stock could take a short term hit on that revelation. But the future is pointing in that direction and any selloff on that news could present a trading opportunity to the upside.

This post by Dan Nathan (@riskreversal) originally appeared on RiskReversal.com

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