Trading Turnaround News with a Spread

On July 6, disk drive component maker Hutchinson Technology ($HTCH) pre-announced stellar results for the quarter ended June 30.  Shares were up almost 20% in pre-market trading.  The stock has performed very poorly in recent years, falling from a high in 2005 of over $40 to just $2 last month.

Shortly after the open we bought the spread 50*HTCH-1*SPY.

The company reported an increase in it’s top-line sales number of 14%.  The CEO said he expects this increase to continue into the coming quarter.  The company has positive Free Cash Flows and reasonable levels of debt.  With these solid fundamentals, we think the downside risk is reasonable compared with the potential upside if the trend turns around.

Below is the chart of the spread since the announcement.  As you can see, the spread traded higher on Wednesday, Thursday, and Friday.  On Friday it broke through resistance and traded as high as 22 before closing at 19.  We continue to hold the spread.  The company is expected to announce earnings after the close on July 26. We will most likely be out of the position by then.

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.