This week we are discussing another of Investor’s Business Daily (IBD) Top 50 List companies. In one of our portfolios, we use this list to find stocks which have displayed a strong upward momentum, and we place spreads which will profit if the upward momentum continues for about six more weeks. Actually, the stock can even fall a little for the maximum gain to be made on these spreads.
Will Nvdia (NVDA) Continue Its Upward Momentum?
Several articles have recently been published on the positive outlook for NVDA. Here are two of them – Nvidia: Citigroup Analyst Thinks The Stock Can Go To $300 and BofAML pushes Nvidia to new price target high; shares up 2.7%.
If you agree with these analysts, you might consider making this trade which is a bet that NVDA will continue its upward momentum (or at least not decline very much) over the next six weeks:
Buy To Open NVDA 21Jul17 140 puts (NVDA170717P140)
Sell To Open NVDA 21Jul17 145 puts (NVDA170717P145) for a credit of $2.30 (selling a vertical)
This price was $.02 less than the mid-point of the option spread when NVDA was trading just below $150. You should be able to get close to this amount unless the stock moves quickly higher. (In my personal account, I sold this spread on Monday for $2.33).
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $2 per contract (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $228 and your broker would charge a $500 maintenance fee, making your investment $272 ($500 – $228). If NVDA closes at any price above $145 on July 17, 2017, both options would expire worthless, and your return on the spread would be 83% (586% 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. The Terry’s Tips portfolio which places spreads like the above one has gained 76% in the first five months of 2017 in spite of incurring some losses on some of the spreads placed. 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.