WDC has fallen from 799 to 353 and now trades at 13 or 14 times forward, below historical and sector averages, leaving it relatively cheap; demand exceeds supply and guidance implies 45% revenue growth with 55% to 56% margins, but a margin below 55% would be a concern and Chinese competition is a risk.

It's a test for Western Digital, as the memory chip giant releases its quarterly report after the close of trading. Wall Street expects earnings of $4.09 per share on an adjusted basis, a huge jump compared to the same period last year when it earned $1.78 per share.

On a quarterly basis , that would represent a gain of approximately 15%. Revenue is expected to rise to more than $4.1 billion. This would represent a 48% year-on-year increase.

Now, Western Digital shares have relatively outperformed the broader market on a year-to-date basis with a gain of nearly 200% , but they have recently fallen and are down today as investors question the AI arms race and how long its ability to set prices will last.

Is Western Digital a valuable investment opportunity? Their prices have dropped. Therefore, despite rising over the past 12 months, it has fallen significantly from its highest levels.

Why? Not because they are doing anything wrong. The stock was valued slightly above its worth. Now, everyone is saying that it is relatively undervalued . They are forecasting revenue growth of 45%, gross profit margins between 55% and 56%, and earnings per share of around $4.

This stock is cheap and falls below the average for its sector. It is 23 to 25% lower than the average for its sector. The average 5-year price-to-earnings ratio is also low at 55%.

So, this is a stock that makes data storage, and it's a company that has seen heavy selling because the whole group has seen a significant decline.

The question is, what will happen with this particular company , as it appears to be about to announce good figures? Will the stock rise? Is it a valuable investment opportunity despite its rise over the past 12 months?

It's baffling here, but Western Digital has dropped from a high of 799 to 353, unbelievable. I think several things are at play here. Yes, as Kevin mentioned, when it was hitting all-time highs near $800 in the middle of the summer, it was probably overvalued .

I believe the forward price-to-earnings ratio exceeded 40 at that time.

Well, we're now back to the 13 or 14 times range going forward. So, it has now fallen below its historical average. They're focusing on hard drives, aren't they? Hard disk drives (HDDs).

Therefore, they do not have the full range of dynamic random-access memory (DRAM), NAND, and high-bandwidth memory that Micron might have at this stage.

Therefore, it is often ranked alongside Seagate Technology, but it has fallen much further than that . We've fallen 55 percent from our all-time highs in mid-summer.

This, as you know , is far less than what we have seen from declines at Micron, Seagate Technology, and SanDisk. Therefore, in terms of its competitors in this field, its performance was slightly lower.

Now, you also have to take into account that there is, as you know, competition that may come from some Chinese companies at this stage. Prices continue to rise. Kevin also mentioned the footnotes.

Observe those margins. If it falls below 55%, noting that the midpoint of the guidance provided by the company was around 55.5 percent. If it falls below 55, that will also be a cause for concern going forward.

However, despite this, there is still strong demand that exceeds supply at this stage for those stationary engines.

Okay, I want to give this deal some time. Although it will announce earnings, I have chosen an expiry date of October 30, with the expected movement for the next eight days being $38. Let's round it up to exactly $40.

I researched something within the category of " Vertical Spread" . Buying October 30th options for both. Buy at 350, sell at 390. Therefore, the bid/ask spread (Vertical Call Spread) is $40.

I looked at it at around $14, and it's now trading at about $0.35 higher. Around $14.35, but a $ 40 purchase price difference trading at around $14 gives you a profit of nearly three times that if you think about it, if you get to or close to $40 .

Therefore, this deal is not highly likely. Isn't that so? You need a movement in price. You need a move above $364 for the deal to break even. But after that, everything up to 390 is considered a profit.

So, if you think this valuation is cheap as we indicated, and if you think it has a chance to move, I've given you a little longer time , 8 days in this trade, and an upward move of $40,

Western Digital expects one-day traffic. Remember, a one-day movement of approximately $24 in either direction for this stock prior to this report, up or down $24.

Kevin buys weekly options on October 30 that expire in 8 days. He buys call options at an execution price of 350, which is in the money by about four dollars. Then, in exchange for this bullish buy order, he sells a call option with an execution price of 390.

So, it is a bullish vertical buy order with an offer of $40 and a borrow cost of about $14. This is your risk, $1400 in this deal. This raises your breakeven point to $364 on the upside .

This is less than 2% above the current share price, and within the range of what the options market has priced for a one-day move plus or minus $24 for that expiry, and $38 plus or minus in either direction that is what they expect by October 30.

Kevin is in line with that in this vertical upward buying deal .

One thing that is noteworthy is that we usually see implied volatility levels rise sharply before earnings announcements, right? $24 on a share priced at $354. Based on the percentage, they probably don't expect a big move.

The current percentile rank of implied volatility is only 14% at this stage due to the volatility we have seen. Okay, that's over a 52-week period, so keep that in mind. But we have seen a lot of fluctuations in the names of these memory chip companies.

So even before the earnings announcements, expectations are relatively low compared to historical records of a one standard deviation movement, either upward or downward.

But this is a vertical upward buy. You don't need such a big move . You have eight days at this center and we have flexibility regarding trading management. You don't need to wait eight days to get out of this deal.

If the market is open and this stock starts to expand, let's say the stock reaches 370 or 380, and the price of the vertical trade starts to rise, then you can close it completely or part of it before profits if the market is open.

So keep that in mind, there is little flexibility regarding trading management.

Kevin, your trade is more aggressive in terms of direction. I took a more conservative approach to my trade, which was just a small short vertical buy order with a $5 spread, neutral to bearish, and I used weekly options for October 23.

I looked at the stock price, which is trading at approximately 354 here. I sold a call option at an execution price of 375 and bought a call option at 380. So, a wide, short vertical call option with a range of $5, neutral to bearish, is accumulating roughly what was trading at 110 previously and is now over 120.

So, you can accumulate a little more, but that's because the stock has gone up. If you accumulate 110, this is what you can achieve: $110 per spread with a risk of $390 and a breakeven point at $376.10 up, Keif.

So, I'm giving myself a small margin of safety here for the upside, just a short-broad vertical buy and sell option in a $5 range, how about that?

Yes, the expected movement is $24. You're going about $22 above the market price. So, this seems like a reasonable level to place your short vertical buy option if you think one of three things might happen, right?

If the price stays here, or falls, or rises but does not exceed 375, then a high probability short vertical buy option combines theta value and defined risk.

So, Tom, this is the exact opposite of the long vertical buy option, isn't it? It is a short vertical buy option and will perform well in three out of four scenarios. My long vertical buy option will pay more if I'm right , but it needs a move, Tom.

Oh yes, definitely oh in that case. There's a 75% chance that the short buy option at 375 will be out of the money at expiry, which is what you want, right? You want it to stay below 375 and keep only the credit you've accumulated in the process.

So, it is also a high-probability center . So, keep that in mind.