This week we are featuring a company that was recently added to the Investor’s Business Daily (IBD) Top 50 List. The stock has displayed strong upwards momentum and we look to place spreads that take advantage of this underlying strength.
Cognex (CGNX) Is Set to Make New Records
Cognex reported earnings at the start of the month which led to a rally above a significant technical hurdle. Cowen has since raised price targets to $135 and Zack’s equity research has written a compelling article outlining why they expect further upside in addition to rating the stock as a Strong Buy.
CGNX rallied to a record high after earnings, taking out a notable barrier from a horizontal level at $96.06 as well as the psychological $100.00 price point. The horizontal level had previously held the stock lower on several attempts since early June.
The stock price has since corrected lower and over the past week the $100.00 level has held buyers to lift the price higher. In the event the psychological level does not hold, support at $96.06 carries confluence with the 20-day moving average and a rising trendline that originates from a low posted in early July.
If you concur that Cognex has some further upside potential, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next five weeks.
Buy To Open CGNX 15SEP17 95 Puts (CGNX170915P140)
Sell To Open CGNX 15SEP17 100 Puts (CGNX170915P145) for a credit of $1.43 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when CGNX was trading near $101. 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 $141 and your broker would charge a $500 maintenance fee, making your investment $359 ($500 – $141). If CGNX closes at any price above $100 on September 15, 2017, both options would expire worthless, and your return on the spread would be 39% (408% 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.