Profit from today's drop in Sandisk

Sandisk (SNDK) released earnings that were positive on the top and bottom line, however investors are pounding the stock today because margins are lower than in previous quarters.  The lower margin seems to be due to the relationship with Apple, which requires Sandisk to produce specialized components at either a higher cost, lower price or both.  Our view on this is that the volume of unit sales from Apple will more than make up margin pressure on Sandisk's overall book of business.  They continue to also grow in the Solid-State Drive (SSD) market, and they also recently acquired Fusion-IO (FIO).  

We like the bullish case on SNDK, but we still remain cautious on the market overall at current levels.  In the short term we are selling October $77.50 striks Puts on SNDK for $1.26 today.  This gives us a credit of $126, and we tie up $7,750 of margin for an effective yield of 1.6% in 3 months if these Puts expire worhless.  

If SNDK trades above $76.24 at October expiration these puts will expire worthless and we'll keep all of the premium, if it trades below that level then we will have to buy the stock unless we close this position.  We'd be glad to buy SNDK  at an effective price of $76.24 considering the growth in the business.

You can go closer to the money if you really want to own the stock, but considering the recent pullback we'd rather wait to see where the stock settles.  It tradesat $93.80 today, which is major gap down from it's up trend and it also went from being $9 above its 50 DMA to now being $5 below it.