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 Terry’s Tips portfolio that trades these spreads in an actual account for subscribers to follow on their own or have trades made for them in their account through the free Auto-Trade service offered by thinkorswim has gained 79% so far in 2018.
Nvidia (NVDA) Is on the Verge of a Big Breakout
Several analysts have an optimistic outlook towards NVDA despite the stock trading near some important resistance. Here are two of them – Things Are Going Right for NVIDIA and AMD and Semiconductor Stocks Soar to Highest Level in Decades Despite Deal Woes.
NVDA tested resistance at the big psychological $250 price point in the past week for the third time this year. However, with momentum indicators showing no signs of a top and as triple tops are generally rare, the probabilities suggest sellers will give up defending the resistance level. Retracements from the level have also become increasingly narrow since the initial approach in early February which provides a technical indication that buyers are regaining control. When a big level such as the one we are seeing in Nvidia now breaks, it often accompanies some sharp upside follow through.
If you agree there’s further upside ahead for Nvidia, 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 NVDA 20APR18 245 Puts (NVDA180420P245)
Sell To Open NVDA 20APR18 250 Puts (NVDA180420P250) for a credit of $2.20 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when NVDA was trading near $250. 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 $218 and your broker would charge a $500 maintenance fee, making your investment $282 ($500 – $218). If NVDA closes at any price above $250.00 on April 20, both options would expire worthless, and your return on the spread would be 77% (882% 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.