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 portfolios to spot outperforming stocks and place spreads that take advantage of the momentum. We selected this same company six weeks ago, and the spread we placed at that time will have gained 60% by next Friday if the stock ends up above $123 at that time (it is about $126 right now).
Red Hat (RHT) is Set To Extend the Momentum
Red hat stock saw some strong gains in 2017 and several analysts believe there is further upside ahead including BMO Capital Markets who have raised their targets to $142.00 and Wells Fargo & Co who are looking for a rise to $144.00.
From a technical perspective, RHT has been consolidating sideways for a few months. A confluence of support from a rising trendline dating back to a low posted in June and a horizontal level at $120.00 recently triggered a turn higher which has resulted in the stock price climbing back above its 50-period daily moving average. The $130 handle may present a hurdle but a break of the level is likely to accompany a renewal of upside momentum.
If you agree there’s further upside ahead for Red Hat, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next four weeks.
Buy To Open RHT 16Feb18 120 Puts (RHT180216P120)
Sell To Open RHT 16Feb18 125 Puts (RHT180216P125) for a credit of $1.83 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when RHT was trading near $126. 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 $181 and your broker would charge a $500 maintenance fee, making your investment $319 ($500 – $181). If RHT closes at any price above $125 on February 16, both options would expire worthless, and your return on the spread would be 57% (647% 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.