The Spread Trader: Bear Put Spread On 3D Systems (DDD)

| December 17, 2012 | 0 Comments

DDD OptionsSome of the hottest stocks of 2012 are those of companies that specialize in 3-D printing. 

In a nutshell, 3-D printers convert digital objects in computer-aided design software or 3-D scanning and sculpting devices into physical objects made from plastic, metal, and composite print materials.

 The two major players in 3-D printing are 3D Systems (DDD) and Stratsys (SSYS).  So far this year, DDD is up a whopping 218% and SSYS has gained 124%.

These high flying stocks are a growth investors dream.

DDD’s earnings per share (EPS) have grown at an average of 95% per year over the last five years.  And EPS are growing 67% this year.  Not to be outdone, Stratsys’ EPS growth is off the charts at 114% this year.

The catalyst for the surge in earnings growth is price.  The cost of 3-D printers has fallen dramatically this year.  The introduction of 3-D printers that cost under $1,000 has opened up new and profitable markets for DDD and SSYS.

But here’s the thing…

It’s nearly impossible for DDD and SSYS to continue growing earnings at this pace.

In fact, analysts project DDD’s EPS to grow at 14% and SSYS at 20% per year over the next five years.  That’s a far cry from the 67% and 114% EPS growth rates this year.

If DDD and SSYS don’t live up to investors sky high expectations, they’re doomed to come crashing back to earth.  Put simply, 3-D printing stocks strong performance is running ahead of the fundamentals.   

Let’s take a closer look at DDD…

At a recent price of $47.68, DDD has a P/E ratio of 68.  That means investors are paying $68 for every $1 the company earns.  Even if they manage to hit their lofty EPS estimates of $1.57 next year, the stock is still trading at forward PE of 30x next year’s earnings. 

If there’s even a hint that DDD growth rate is slowing, we could see a massive correction in the stock price. 

This looks like a great opportunity for a bear put spread on DDD.  This bearish strategy is made by buying one put option and selling another put option at a lower price.

Here’s what to do now…

Buy the DDD May 2013 $45 put for $5.82 and sell the DDD May 2013 $35 put for $2.00.

Remember, when buying a put spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.

This trade costs us $382 ($582 – $200) per contract.  Our breakeven on the trade is $41.18.  If DDD is trading at exactly $41.18 on May 17th, we’ll get our $382 back.

 We’ve also limited our risk to our initial $382 investment.  If DDD is trading above $45 on May 17th, we’ll lose $382.  But no matter how high DDD goes, we can never lose more than our initial investment.

Now for the good part… profits!

Our maximum profit of $618 comes if DDD is trading at or below $35 on May 17th

In other words, we’re risking $382 for a chance to make $618.  According to our tracking system, there’s a 35% chance of this trade making money.  That’s a good risk/reward in my book.

Good Investing,

Corey Williams

Tags: , ,

Category: The Spread Trader

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.