Marvell Technology (MRVL), the chip designer company - not the comic book brand - produces powerful free cash flow (FCF) and high FCF margins. This essentially gives MRVL stock a valuation of at least 26% higher. 

For example, based on my analysis, MRVL stock is worth at least $87.43 based on its high FCF margins. That is 26% over today's price of $69.02. 

Since its earnings were released on March 7, the stock is off 19% from $85.09. The market is skeptical, giving it high put options premiums. It expects the stock to fall further. This makes short-put plays attractive for income for short sellers of out-of-the-money (OTM) puts.

The Short Put Opportunity

I discussed this opportunity in my last article three weeks ago on April 5, when MRVL stock was $72.23, “Marvell Technology Put Options Have High Premiums - Worth Shorting by Bullish Investors in MRVL Stock.”
At the time, I suggested shorting OTM puts at a strike price 5% below the spot price of $68.00 for the expiration period ending April 26. The premium received was $1.72, for a put yield to the short-seller of these puts of 2.53% (i.e. 1.72/$68.00).

As it turned out, MRVL closed at $69.03 on April 26, as seen in Barchart's Price History tab. That means the strike price stayed out of the money. As a result, the short seller was not obligated to buy 100 shares with the cash secured for this short sale (i.e., $6,800 per put contract sold short).

It's also good to note that shorting a strike price well below the spot price leaves room for MRVL stock to drop without triggering an assignment. But even if this occurred the investor would not be worried for two reasons.

Why Short Selling MRVL Puts Works

For one, the stock is cheap at the strike price, as I pointed out in the article. I showed how it was worth $87.43 per share based on the company's high 33.3% FCF margins. So, for example, based on analysts' revenue forecasts of $5.32 billion in sales this year, it could generate $1.77 billion in FCF. And based on 2025 sales forecasts of $7.05 billion, the FCF forecast is $2.35 billion. So, on average FCF could be over $2 billion in the next 12 months (NTM) on a run rate basis.

Using a 2.5% FCF yield metric, that implies that MRVL stock is worth $80 to $82 billion. That is 25% to 26% over its present $59.9 billion market value. This implies the stock is worth $87.43 per share. 

If the company reports continued high FCF margins in its upcoming earnings results for the period ending May 2, the stock could easily rebound. That is why the short seller would be willing to sell short OTM puts below the spot price.

Another reason a short seller of these puts is that the breakeven price is well below the spot price. For example, $1.72 in premium income lowered the breakeven price from $68.00 to $66.28. That was well over 8.2% below the spot price. As it turned out, since MRVL stock fell this extra income helped allow the investor to make money.

So, it makes sense to now roll this trade over again.

Shorting MRVL Stock OTM Puts Again

For example, look at the put expiry chain ending May 31, which is 32 days away from today. It shows that the $64.00 strike price, which is $5.16 below today's price, or 7.46% out-of-the-money (OTM), has a premium of $2.29 per put option contract on the bid side.

That means that the short seller at this strike price can make an immediate yield of $3.58% (i.e., $2.29/$64.00). That is even higher than the prior short sale play of 2.53% with a smaller OTM width.

This means that the short seller who secures $6,400 with their brokerage firm can enter an order to “Sell to Open” 1 put contract for May 31 expiration and receive $229.00. 

Moreover, if the investor can repeat this play every 4 weeks for a quarter and make $229 each time, the expected return (ER) is $687.00. That works out to a 10.73% ER in just 90 days.

That shows how profitable shorting these puts can be for short-sale put investors.

The downside is that the stock could fall further. That could lead to an unrealized capital loss, especially if MRVL stock falls below the strike price. 

But, at least in this case, the breakeven price is $64.00 - $2.29, or $61.71 per share. That is 10.95% below today's price. Even if the stock falls to this price, it provides a good entry point for long-term investors in Marvell Technology stock.

The bottom line is that MRVL stock looks cheap here and short sellers of its puts stand to make a good expected return.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.