This week we are featuring a company listed on the Investor’s Business Daily (IBD) Top 50 List. We use this list in one of our portfolios to target outperforming stocks and look to place options spreads that take advantage of the underlying trend..
You might be interested to know that Terry’s Tips carries out 10 actual options portfolios for paying subscribers to follow if they wish. This week was a typical one for us. The market (SPY) rose 0.8% while our composite portfolio average gained 2.8%. So far for the year, our composite average has gained 54% (after commissions).
Is Applied Materials (AMAT) Ready to Accelerate Higher?
Several analysts have recently refreshed their bullish outlook towards Applied Materials and have raised price targets. These articles provide more details Applied Materials Gets Several Price-Target Hikes on Earnings and Applied Materials Targets Surge On Upbeat Memory Chip, Display Markets.
From a technical perspective, AMAT has been consolidating within a range since around May with buyer’s holding the stock well above the $40.00 price point. Buyer’s lifted the price higher about two weeks ago on an approach to the lower bound of the range. While a horizontal level at $43.06 initially acted as resistance in the turn, the level held several declines in the past week. AMAT shows a strong bullish trend on a weekly chart dating back to early 2016, and like several of the IBD Top 50 stocks, has been an outperformer within its sector.
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, or at least not decline very much over the next five weeks.
Buy To Open AMAT 29Sep17 42.5 Puts (AMAT170929P425)
Sell To Open AMAT 29Sep17 43 Puts (AMAT1700929P430) for a credit of $0.17 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when AMAT was trading near $43. 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 $15 and your broker would charge a $50 maintenance fee, making your investment $35 ($50 – $15). If AMAT closes at any price above $43 on September 29, 2017, both options would expire worthless, and your return on the spread would be 43% (446% 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.