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.
I thought I might share with you the first paragraph of this week’s report to our paying subscribers – “Bad Week for the Market (Down 1%), But Our Composite Portfolio Average Gains 5% Thanks to Blow-Out Week for Wiley Wolf (up 47%): A week ago, we were celebrating a 26.5% gain in Wiley Wolf when FB gained 3.6%, but that was nothing compared to this week’s colossal 47.6% gain on a 3.0% rise in the stock. In two weeks, the portfolio has moved from a value of $4,472 to today’s $8,353. The 10K Strategy can deliver extraordinary results when you are leaning to the bullish side and the underlying cooperates by going up (which you expect it to do or you wouldn’t have selected that stock in the first place). Positive results from this strategy also appeared this week in Rising Tide where the portfolio gained 10% while the underlying MA rose 1%.”
I hope you enjoy this week’s trading idea.
Lululemon (LULU) Stock Price Surges Following Earnings
LULU rose to record highs earlier this month following its earnings report. Several analysts think the stock can go a lot higher, here are two of them – Was Lululemon Athletica Inc’s Earnings Growth Better Than The Industry’s? and 7 Debt-Free Companies Doing Big Stock Buybacks
Lululemon Athletica’s stock price gapped higher following the earnings announcement, reaching a high just shy of the $130 handle. Momentum has slowed somewhat, yet the technicals remain supportive as the stock trades within a rising up channel and has held above it’s 20-day moving average.
If you agree there’s further upside ahead for LULU, 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 LULU 27JUL18 120 Puts (LULU180727P120)
Sell To Open LULU 27JUL18 124 Puts (LULU180727P124) for a credit of $1.48 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when LULU was trading near $124. 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 $145.50 and your broker would charge a $400 maintenance fee, making your investment $254.50 ($400 – $145.50). If LULU closes at any price above $124 on July 27, both options would expire worthless, and your return on the spread would be 57% (650% 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.