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 Ulta Beauty (ULTA) Following the Technical Break
Several analysts are optimistic regarding the outlook for Ulta Beauty stock, here are two of them – Ulta Beauty Up 19% in 3 Months on Strategic Efforts and David Rolfe Comments on Ulta Beauty.
ULTA made a notable technical break in early September by clearing above horizontal resistance at $260 that had held it lower throughout the summer. The stock has corrected lower since hitting highs around 290 which may offer an attractive entry point. The recent decline has not accompanied much downside momentum, which is especially significant when considering overal market conditions, suggesting a correction is taking place rather than a turn in the near-term trend.
If you agree there’s further upside ahead for ULTA, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.
Buy To Open ULTA 16NOV18 270 Puts (ULTA181116P270)
Sell To Open ULTA 16NOV18 275 Puts (ULTA181116P275) for a credit of $2.18 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ULTA was trading near $276. 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 $215.50 and your broker would charge a $500 maintenance fee, making your investment $284.50 ($500 – $215.50). If ULTA closes at any price above $275 on November 16, both options would expire worthless, and your return on the spread would be 76% (867% 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.