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I look forward to having you join in the fun and profits! Now on to the trade …

It’s Intuitive

Lots to chew on this week with earnings season in full swing, so let’s dive right in with a bullish trade on Intuitive Surgical (ISRG). The company makes surgical instruments, notably the da Vinci robot, that emphasize minimal invasiveness. ISRG reported Tuesday after the bell, easily beating on the top (profit) and bottom (revenue) lines. Earnings per share increased 30% from a year earlier, while revenues improved more than 16%. Much of this growth came from a 21% increase in da Vinci procedures.

Analysts were quick to raise their target prices, with at least a half dozen trying to beat each other to the punch. These were not minor increases, either. One firm raised its target by 35%, while several others were around 15%. That equates to increases of $30 to more than $100 … not bad for a $375 stock. Oddly, there were no rating increases, keeping ISRG at a solid buy rating. However, there are few holds on the stock, leaving some room for upgrades.

Also odd is the fact that the stock fell as much as 3.4% on Wednesday, though it closed just 0.4% lower. That’s the smallest move after earnings in more than 11 years. There wasn’t much action after that, as ISRG gained about a percent on Thursday and Friday. The stock reaction might give one pause given the strong earnings results. However, the muted move makes more sense since the company already released bullish guidance numbers a couple of weeks ago. That caused the shares to pop more than 10%, making this week’s news less impactful.

The guidance surge pulled the stock away from its 20-day moving average, a trendline that has guided a 47% rally over the past three months. The shares spent a few days just below the 20-day in early January, the only time they were staring up at the trendline since crossing above it on November 1. We are therefore using the 20-day as the basis of this week’s bullish trade. The short put strike of our spread sits just below the 20-day, which is about 6% beneath Friday’s close.

If you agree that the stock will continue trading above, or at least near, the 20-day moving average (blue line), consider the following credit spread trade that relies on ISRG staying above $350 (red line) through expiration in 7 weeks:

Buy to Open the ISRG 15 Mar 345 put (ISRG240315P345)
Sell to Open the ISRG 15 Mar 350 put (ISRG240315P350) for a credit of $1.00 (selling a vertical)

This credit is $0.10 less than the mid-point price of the spread at Friday’s $374.76 close.   Unless ISRG surges sharply at the open on Monday, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $98.70. This trade reduces your buying power by $500, making your net investment $401.30 per spread ($500 – $98.70). If ISRG closes above $350 on Mar 15, the options will expire worthless and your return on the spread would be 25% ($98.70/$401.30).

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