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. The actual Terry’s Tips portfolio that trades most of these ideas started out 2018 with $5000. Along the way, we withdrew the entire $5000 from the portfolio so subscribers who were following it would have all their money back and be playing with their profits. The portfolio is now worth $4980 which is pretty darn close to doubling their money in nine months. Other portfolios we conduct for paying subscribers have done better, but we are proud of this one as well.
Momo inc. (MOMO): A Growth Stock for Value Investors
It’s rare to see a growth stock that is offered at good value, this article makes a compelling case that MOMO falls into that category – Have Investors Priced in Momo Inc’s Growth? and the following article provides several additional reasons for why we may see more upside – One Chart Tells You All You Need to Know About Where MOMO Stock Is Going.
The technical outlook for MOMO points to strong downside support and highlights upside potential. The stock closed on Friday above a confluence of support which includes the 50-day moving average, a horizontal level at $43.17 as well as the lower bound of a rising trend channel that has encompassed price action for the past month. Also, in candlestick analysis, Friday’s candle has taken the shape of what is commonly known has a bullish hammer candle. This signals a strong hold of support and potential for a reversal from the recent eight-day correction.
If you agree there’s further upside ahead for MOMO, 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 MOMO 02Nov18 41 Puts (MOMO181102P41)
Sell To Open MOMO 02Nov18 43.5 Puts (MOMO181102P43.5) for a credit of $1.00 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MOMO was trading near $144. 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 $97.50 and your broker would charge a $250 maintenance fee, making your investment $152.50 ($250 – $97.50). If MOMO closes at any price above $43.50 on November 02, both options would expire worthless, and your return on the spread would be 64% (730% 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.