Dykstra: A Marvellous Call on Semis

Before we get to the new pick this morning, I want to update my Komag(KOMG Quote) buy order of 20 September 25 calls (QKXIE), moving the price to $1.65.

I noticed that not all of the good-till-canceled buy orders at $1.50 got filled on Friday. We have almost four months until expiration, and the risk-to-reward makes sense with almost 30% of the shares sold short on a stock with a float of only 22.70 million shares. If a short squeeze takes hold on this one, look out! This stock could bounce back to $30 before you can say boo.

Now for today's stock: Marvell Technology(MRVL Quote).

Great candidates for deep in-the-money calls often include value stocks as well as beaten-down growth stocks. Ideally, when using DITM calls, I want to find stocks where the premium is about $1 or less, that provide four to seven months to control 1,000 shares of the common stock. (Simply put, premium is calculated by adding the strike price -- $12.50 in this case -- to the price paid for the deep-in-the-money call, or $3.70. Then take the total, $16.20 on Marvell, and subtract the cost of the stock, $15.51, and you have the premium: 69 cents. Anything less than $1 for the ability to control the stock between four and seven months is just plain awesome. Last thing, please use a limit order.)

The less premium paid, the smaller the exposure and the higher the percentage increase when the calls hit. Growth stocks tend to trade with exaggerated extremes far more than those in other sectors.

Marvell is a growth stock in the hard-hit semiconductor sector that has been hit with an options backdating scandal not too different from the situation over at Apple. As a result, the company has seen its share price drop a staggering 57% from its 52-week high, and it's now trading at its 52-week low. But Marvell continues to grow revenue over 20% a year.

Although many factors distinguish Apple and Marvell from each other, I believe much of the positive with Apple -- and the negative with Marvell -- stems from the fact that Apple deals with end-consumer products. Many investors simply do not know about the industry-leading technology at Marvell.

In addition, the semiconductor industry as a whole has been hard hit for a while now. Stocks such as Marvell and previous DITM picks Intel(INTC Quote), Texas Instruments(TXN Quote) and Broadcom(BRCM Quote) have all reached prices below fair-market value. That's why they provide such potentially profitable DITM plays.

Although I do not strictly follow analysts' recommendations, I often use them as a guide. With Marvell, 18 analysts following the company list it as a buy or better, with six holds and only three sells. Although the company reported revenue slightly below the analysts' consensus, Marvell is strong in the storage space market and has advanced nicely into the fast-growing networking sector.