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.
Will Dollar General Power to Record Highs?
DG is one of the few stocks on the IBD Top 50 list that is on the verge of breaking to record highs. These two articles may help to explain what the driving force behind the momentum is Can Continued Growth Fuel Dollar General Corporation To Reach New Levels? and Sturdy Comps, Better Pricing to Propel Dollar General’s Sales
Technical strength in DG is seen best via correlation when looking at growth stocks and US equity indices. As well, the stock appears to have recently broken above a bullish flag pattern, climbing above the 50-day moving average in the process. DG ended the past week holding support near 109 and shows further support from a strong confluence found just above 107.
DG Chart October 2018
If you agree there’s further upside ahead for DG, consider this trade which is a bet that the stock will continue to advance over the next five weeks, at least a little bit.
Buy To Open DG 23NOV18 105 Puts (DG181123P105)
Sell To Open DG 23NOV18 110 Puts (DG181123P110) for a credit of $1.75 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when DG was trading near $110. 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 $172.50 and your broker would charge a $500 maintenance fee, making your investment $327.50 ($500 – $172.50). If DG closes at any price above $110 on November 23, both options would expire worthless, and your return on the spread would be 53% (605% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
IBD Underlying Updates October 18, 2018
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.
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