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 Motorola Solutions (MSI) Continue to Outperform?
Investors have many reasons to remain bullish Motorola Solutions including a recent dividend hike as well as an upgrade accompanied with a raised price target. Take a look at the following articles for details – Motorola Rewards Shareholders With 9.6% Dividend Hike and Motorola Solutions Upgraded to Buy by Zacks Investment Research.
The main appeal from a technical perspective is the outperfomance of Motorla stock versus the S&P 500. This was first seen in late October when MSI bottomed very near to its mid-month low. Recent price action appears much more obvious as the equity index turned lower on November 8 while MSI managed to hold near highs. There seems to be a small hurdle near $130, but after several attempts bears have failed to elicit a downturn. This is especially significant considering that equities were broadly weaker during the period this resistance level was being tested. Considering the overall trend and the strength displayed as of late, the odds favor an upside break. The below chart has an overlay of the S&P 500 to illustrate the recent divergence.
If you agree there’s further upside ahead for MSI, 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 MSI 21DEC18 125 Puts (MSI181221P125)
Sell To Open MSI 21DEC18 130 Puts (MSI181221P130) for a credit of $1.84 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MSI was trading near $130. 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 $181.50 and your broker would charge a $500 maintenance fee, making your investment $318.50 ($500 – $181.50). If MSI closes at any price above $130 on December 21, both options would expire worthless, and your return on the spread would be 57% (650% 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.