This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Arista Networks (ANET): Should You Buy the Dip?
Upside price targets for Arista Networks have recently been raised by several analysts, here are two of them – Arista Networks PT Raised to $270.00 at BMO Capital Markets and Arista Networks PT Raised to $330 at Oppenheimer Following Management Meetings
ANET dipped lower in the past week inline with the broader market correction that took place. The stock price ended the week at a horizontal level near $264 that has acted as both support and resistance in the year thus far. Further support is seen slightly below horizontal support in the form of a rising trendline originating from a low posted in early November. Most of the stocks listed in the IBD Top 50 list of companies have dipped lower as a result of last week’s market correction but ANET stands out as it has had a strong performance, relative to the list, since turning higher in early 2016.
If you agree there’s further upside ahead for Arista Networks, consider this trade which is a bet that the stock will continue to advance over the next four weeks, or at least not decline very much.
Buy To Open ANET 20APR18 255 Puts (ANET180420P255)
Sell To Open ANET 20APR18 260 Puts (ANET 180420P260) for a credit of $1.98 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when NVDA was trading near $265. Unless the stock rallies quickly from here, you should be able to get close to this amount.
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $196 and your broker would charge a $500 maintenance fee, making your investment $304 ($500 – $196). If ANET closes at any price above $260.00 on April 20, both options would expire worthless, and your return on the spread would be 64% (735% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.