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.
Should You Buy the Post Earnings Dip in Charles River Laboratories (CRL)?
Recent price target upgrades suggest more upside for CRL. Take a look at these two articles that contain the details – Charles River Laboratories PT Raised to $148.00 at Robert W. Baird and Charles River Laboratories Given a $147 Price Target at Royal Bank of Canada.
CRL has been contained within a rising trend channel for just over a year now. A spike higher following their latest earnings report was met with sellers at the top of the channel, resulting in a dip back to roughly the halfway point. Support is found at $125 which was where the stock was trading prior to the earnings inspired gap up. CRL has been outperforming the broader markets as it traded at record highs just a few weeks ago. The trend remains healthy, technically speaking, on a daily chart and higher time frames and there have not been any technical indications that the uptrend won’t continue.
If you agree there’s further upside ahead for CRL, consider this trade which is a bet that the stock will continue to advance over the next four weeks, or at least not decline very much.
Buy To Open CRL 21Dec18 120 Puts (CRL181221P120)
Sell To Open CRL 21Dec18 125 Puts (CRL181221P125) for a credit of $1.53 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when CRL was trading near $127. 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 $150.50 and your broker would charge a $500 maintenance fee, making your investment $349.50 ($500 – $150.50). If CRL closes at any price above $125 on December 21, both options would expire worthless, and your return on the spread would be 43% (581% 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.