A quick update on our two latest suggestions using the Diagonal Condor Earnings Strategy – both Redhat (RHT) and Carmax (KMX) spreads could have been closed out on the Friday after earnings were announced for a 49%+ gain for the week.
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.
Consider Applied Materials (AMAT) Following a Pullback To Support
Several articles have recently been published that outline the potential for growth in Applied Materials stock price, here are two of them – Is Applied Materials a Strong Growth Stock? and Have Sufficient Potential Left To Grow? Applied Materials, Inc.
AMAT has been correcting lower over the past four weeks and is now seen near a confluence of support. The stock shows support at $51.73 from a 61.8% Fibonacci retracement measured from this year’s low to high. As well, the 200-day moving average is found slightly below the Fibonacci retracement.
If you agree there’s further upside ahead for Applied Materials, consider this trade which is a bet that the stock will continue to advance over the next six weeks, at least a little bit.
If you agree there’s further upside ahead for Applied Materials, consider this trade which is a bet that the stock will continue to advance over the next five weeks, at least a little bit. AMAT will announce earnings in the week following the 11May18 series, and we usually see higher stock prices going into expiration week, so this might be a good trade for other reasons as well.
Buy To Open AMAT 11MAY18 49 Puts (AMAT180511P49)
Sell To Open AMAT 11MAY18 52 Puts (AMAT180511P52) for a credit of $1.08 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when AMAT was trading near $52.50. Unless the stock rallies quickly from here, you should be able to get close to this amount
Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $105.50 and your broker would charge a $300 maintenance fee, making your investment $194.50 ($300 – $105.50). If AMAT closes at any price above $52 on May 11, both options would expire worthless, and your return on the spread would be 54% (550% 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.