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.
Monolithic Power Systems (MPWR) Poised to Break to Record Highs
There have been some recent price target upgrades for MPWR that suggest the stock still has some further upside. Here are two of them – Monolithic Power Systems (MPWR) PT raised to $155 at Needham & Company and Brokerages Set Monolithic Power Systems, Inc. (MPWR) PT at $148.38.
The daily chart for MPWR shows three attempts at upside resistance found near $142. As triple top patterns are rare, even more so with strong uptrends like the one seen in MPWR, and upside break appears highly likely. As well, often stop losses get accumulated above notable horizontal levels. Once triggered, these stops provide fuel for a momentum-driven rally. The stock looks to be well supported as it recently recovered back above its 50-day moving average following a brief correction and has been consolidating in a range between prior highs and the 50 DMA.
If you agree there’s further upside ahead for MPWR, 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 MPWR 21SEP18 135 Puts (MPWR180921P135)
Sell To Open MPWR 21SEP18 140 Puts (MPWR180921P140) for a credit of $1.68 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MPWR was trading near $142. 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 $165.50 and your broker would charge a $500 maintenance fee, making your investment $334.50 ($500 – $165.50). If MPWR closes at any price above $140 on September 21, both options would expire worthless, and your return on the spread would be 50% (570% 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.