While investors are anxiously waiting for AI behemoth Nvidia, Inc. (NVDA) to announce earnings today, Aehr Test Systems, Inc. (AEHR) showed up on our list of compressed stocks. AEHR is a company that makes semiconductor testing and burn-in equipment, including testing and burn-in equipment for AI chip manufacturing.
This is the first time AEHR has been on our list of compressed stocks since the stock became optionable. You can see that this stock was trading in the $2 to $3 range before options were available, then it popped up quickly into the $5 range and reached highs in the $50s.
This stock has been unusually quiet near $15 recently. Plus, there is an opportunity to use the volatility skew to our advantage.
This Volatility Term Structure for AEHR shows us the implied volatility for the at-the-money options for each expiration. To learn more about Volatility Term Structure, click here. Volatility expectations jump from September to October because the company has scheduled an earnings report before the October options expire. Investors know that AEHR has the potential to make a big move when earnings are announced. We have a strategy that will profit if the stock makes a big move after earnings.
This Volatility Skew for AEHR shows us the implied volatility for the options at each strike price for the October expiration. We can exploit this skew by selling expensive options and buying cheaper options in a strategy called a ratio backspread.
AEHR’s stock is compressed for the first time since the stock became optionable. Investors know that this stock can make big moves, especially around earnings reports. Normally we like to use straddles to take advantage of a potential big move, but AEHR has a volatility skew that we can exploit by letting someone else pay for our neutral strategy using a ratio backspread.
To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.
To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.
Thank you,
Don Fishback
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