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Archive for the ‘Stock Option Trading Idea Of The Week’ Category

Order Up a Starbucks Spread

Sunday, August 1st, 2021

Starbucks (SBUX) posted a solid earnings report on Tuesday, easily beating both top- and bottom-line expectations. Year-over-year sales and earnings comparisons were ridiculously high, as SBUX was one of the hardest-hit businesses during the depths of last year’s pandemic-rocked economy. But the company grew sales from two years ago and blew out analyst estimates. To top it off, SBUX raised sales and earnings guidance for FY21.

The market did not react well to the report, however, as the stock fell 3.6% through the end of the week. This could be due to the company reporting increased wage and inflation pressure. But analysts were undeterred. While there were no upgrades, price targets were raised across the board, with some reaching as high as $145 (the stock closed at $121.43 on Friday). The average price target is above $128.

On the charts, the stock’s drop pulled it down to its rising 20-day moving average. This trendline supported a pullback in mid-July and has not allowed a daily close below it in more than a month. Note that the short put of our credit spread trade is right at the 20-day.

If you agree that SBUX will stay above its 20-day moving average (blue line in chart), consider the following trade that relies on the stock remaining above 120 (red line in chart) through expiration in seven weeks.

Buy to Open SBUX 17Sep 115 put (SBUX210917P115)
Sell to Open SBUX 17Sep 120 put (SBUX210917120) for a credit of $1.60 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when SBUX was trading at $121.43. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $158.70. This trade reduces your buying power by $500 and makes your net investment $341.30 ($500 – $158.70).  If SBUX closes above $120 on September 17, both options will expire worthless and your return on the spread would be 46% ($158.70 / $341.30).

As Easy as ABT

Sunday, July 25th, 2021

Abbott Laboratories (ABT) reported earnings before the bell on Thursday that beat top- and bottom line estimates. Moreover, the medical device, diagnostics and nutrition company beat expectations across all major business segments. While impressive year-over-year comparisons were helped by depressed activity a year ago, sales grew by 11% compared to 2019. Analysts were notably impressed, and many upgraded their price targets to as high as $136 (the stock closed at $121 on Friday).

The stock dropped on Thursday as much as 2.6% but recovered to close above its 20-day moving average (blue line in chart). This trendline has provided unwavering support since the stock climbed above it in late June. This is part of a larger rally that has covered 15% since the beginning of June. Friday’s 2% jump pulled the stock above the 120 level (red line in chart), which has served as a top since early May. The next sight of potential resistance is 125, the site of April’s high. After that is ABT’s all-time high of 128.54 reached in mid-February.

ABT Chart

If you agree that ABT will stay above its 20-day moving average, consider the following trade that relies on the stock remaining above 118 (green line in chart) through expiration in five weeks.

Buy to Open ABT 27Aug 115 put (ABT210827P115)
Sell to Open ABT 27Aug 118 put (ABT210827P118) for a credit of $0.90 (selling a vertical)

This credit is $0.03 less than the mid-point of the option spread when ABT was trading at $121. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $88.70. This trade reduces your buying power by $300 and makes your net investment $211.30 ($300 – $88.70).  If ABT closes above $118 on August 27, both options will expire worthless and your return on the spread would be 42% ($88.70 / $211.30).

Clean Up with Cintas (CTAS)

Sunday, July 18th, 2021

Cintas (CTAS) may not be in an exciting business – the company provides uniforms, cleaning and restroom supplies, first aid supplies and fire extinguishers – but its recent earnings report was anything but boring. The company easily beat profit forecasts and slightly beat sales projections. Even the low end of the company’s projected EPS range for fiscal 2022 is well above the analyst estimate. The only smudge on the report was the projected sales estimate, which came in below forecasts. Nevertheless, the report was greeted with a slew of target price increases that ranged as high as $450 (the stock closed on Friday at $386).

The initial reaction to the earnings was a 2.6% drop on Thursday. But the stock popped 4.6% on Friday, resuming its recent breakout above a trading range that has dominated in 2021. More importantly, the shares found strong support at the 365 level (red line in chart), which has defined the top of the trading range going back to November. CTAS trades only monthly options in 10-point increments, so we’re using the 380 short strike (green line) for a put credit spread. This is just above the stock’s 20-day moving average (blue line).

CTAS Chart

If you agree that CTAS will stay above its 20-day moving average, consider the following trade that relies on the stock remaining above 380 through expiration in five weeks.

Buy to Open CTAS 20Aug 370 put (CTAS210820P370)
Sell to Open CTAS 20Aug 380 put (CTAS210820P380) for a credit of $3.15 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when CTAS was trading at $386. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $313.70. This trade reduces your buying power by $1,000 and makes your net investment $686.30 ($1,000 – $313.70).  If CTAS closes above $380 on August 20, both options will expire worthless and your return on the spread would be 46% ($313.70 / $686.30).

Micron Technology (MU) At Double-Barreled Support

Sunday, July 11th, 2021

Flash memory and semiconductor producer Micron Technology (MU) reported Q3 earnings last week that easily topped Street estimates. Earnings hit $1.88 per share, more than double from a year earlier and 10% greater than the consensus analyst estimate. Revenues jumped 36% from the year before and beat the estimate by $160 million. Moreover, MU expects further gains in Q4 that are well above analysts’ projections. The reaction from the Street was modestly positive, though there were some concerns over MU’s cost structure.

The stock’s post-earnings price move was anything but positive. The shares fell 5.7% the day after the report and continued lower, bottoming at a 10.6% decline in Thursday’s trading. That low brought the stock to its 200-day moving average, which hasn’t been tested since last October. Friday was an encouraging day for MU, as the stock bounced 2% higher to log its best day since earnings. The 200-day sits at the 75 level, which is where we are placing the short put of our bullish credit spread as we look for trendline support to hold. Note also that the 75-76 area has provided strong support several times throughout 2021.

If you agree that MU will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above 75 through expiration in six weeks.

Buy to Open MU 20Aug 72.5 put (MU210820P72.5)
Sell to Open MU 20Aug 75 put (MU210820P75) for a credit of $0.60 (selling a vertical)

This credit is $0.04 less than the mid-point of the option spread when MU was trading at $78.74. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $58.70. This trade reduces your buying power by $250 and makes your net investment $191.30 ($250 – $58.70).  If MU closes above $75 on August 20, both options will expire worthless and your return on the spread would be 31% ($58.70 / $191.30).

Facebook (FB) Wins in Court and on the Charts

Monday, July 5th, 2021

Facebook (FB) scored a big win in court this week when a federal judge threw out two complaints – one from the FTC and one from several state attorneys general – that it violated antitrust laws. Antitrust clouds have been looming over FB and its mega-giant tech brethren for some time, yet these stocks keep on ticking. FB reacted to the news by hitting an all-time high. But the stock was in rally mode well before the court win, gaining 40% in the past four months. Love it or hate it, FB has a deep roster of legal and lobbying talent that will draw out the regulatory process, if not water it down in the end … whenever that might be.

In the meantime, the stock keeps on chugging. In fact, FB’s market cap crossed the $1 trillion mark this week. If the market is a forward-looking mechanism, then it doesn’t appear too worried that regulators will ultimately prevail. Looking at the options market, out-of-the-money calls are priced higher than the corresponding puts in the 21 Jan 22 series, suggesting that the market sees more upside. The 20-day moving average, which is at 340, has guided the current rally since March. The stock is currently 4% above this trendline, so we’ll use this as the basis for our put credit spread.

If you agree that FB will stay above its 20-day moving average, consider the following trade that relies on the stock remaining above 340 through expiration in seven weeks. Note that FB reports earnings on July 28.

Buy to Open FB 20Aug 335 put (FB210820P335)
Sell to Open FB 20Aug 340 put (FB210820P340) for a credit of $1.50 (selling a vertical)

This credit is $0.07 less than the mid-point of the option spread when FB was trading just below $355. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $148.70. This trade reduces your buying power by $500 and makes your net investment $351.3 ($500 – $148.70).  If FB closes above $340 on August 20, both options will expire worthless and your return on the spread would be 42% ($138.70 / $261.30).

Get a Charge Out of Plug Power (PLUG)

Tuesday, June 29th, 2021

PLUG is a hydrogen fuel cell provider based outside of Albany, NY. The company reported earnings on Tuesday (June 22) after a delay due to some accounting issues. While earnings missed the mark, PLUG’s strong current and projected revenue growth is considered more indicative of the company’s potential. The company also has a strong cash position on its balance sheet. Wall Street generally approved of the numbers, as several analysts raised their price targets.

After a 75% plunge from late January through early May, the stock has been on the rebound, gaining more than 70%. The recent strength has caused the 50-day moving average (blue line below) to turn higher for the first time in three months. Also in play is the rising 200-day moving average (red line below), which sits at $32.50. This trade relies on PLUG staying above the $30 level through the end of July, so support at the 200-day is critical.

Plug Chart

If you agree that PLUG will ride higher along its 200-day moving average, consider the following trade that relies on the stock remaining above $30 through expiration in five weeks.

Buy to Open PLUG 30Jul 27 put (PLUG210730P27)
Sell to Open PLUG 30Jul 30 put (PLUG210730P30) for a credit of $0.95 (selling a vertical)

This credit is $0.06 less than the mid-point of the option spread when PLUG was trading just below $32. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $93.70. This trade reduces your buying power by $300 and makes your net investment $206.30 ($300 – $93.70).  If PLUG closes above $30 on July 30, both options will expire worthless and your return on the spread would be 45% ($93.70 / $206.30).

Chewy on This Trade

Sunday, June 20th, 2021

Chewy (CHWY), the online pet food and supply retailer, reported impressive earnings last week that beat estimates on profits and revenue. Adding to the good news, CHWY raised its full-year 2021 revenue guidance, although it lowered Q2 guidance due to short-term supply chain issues. 

The stock started 2021 on a solid note, gaining more than 30% through mid-February to hit an all-time high. But then like many “pandemic stocks,” CHWY dropped sharply, falling more than 40% during the next three months. However, the shares have been on the upswing for the past month. In fact, the stock has moved above its 50-day moving average, a trendline that has flattened out after its first decline since late 2019. We expect CHWY to continue its uptrend, staying above the 50-day. The short put of our credit spread is just below the 50-day, so support at this trendline should keep the spread out of the money.

If you agree that CHWY will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above 76 through expiration in six weeks.

Buy to Open CHWY 30Jul 72 put (CHWY210730P72)
Sell to Open CHWY 30Jul 76 put (CHWY210730P76) for a credit of $1.40 (selling a vertical)

This credit is $0.03 less than the mid-point of the option spread when CHWY was trading above $78. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $138.70. This trade reduces your buying power by $400 and makes your net investment $261.3 ($400 – $138.70).  If CHWY closes above $76 on July 30, both options will expire worthless and your return on the spread would be 53% ($138.70 / $261.30).

It’s Hip to Bet on Square (SQ)

Sunday, June 13th, 2021

Square (SQ) is considered one of the most innovative companies in the payment processing space. That said, the stock has done what most tech stocks have done so far in 2021 … gone nowhere. In fact, the shares are up less than a percent this year. Moreover, SQ has been in a trading range between 200 and 280 for most of the past seven months.

Despite the sluggish overall performance, we are keying on the support of the 200-day moving average, a trendline that currently sits just above 210. Other than a handful of daily closes below it in May, the stock has respected the support of the 200-day, most notably during the past week. Moreover, we’re using a bullish credit spread, which does not require the stock to go up. Rather, all we care about is that the short put remains out of the money. That’s why we’re banking on the support of the 200-day (blue line), as our short put is at the 210 strike (red line).

If you agree that SQ will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above 210 through expiration in six weeks.

Buy to Open SQ 23Jul 205 put (SQ210723P205)
Sell to Open SQ 23Jul 210 put (SQ210723P210) for a credit of $1.80 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when SQ was trading above $219. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $178.70. This trade reduces your buying power by $500 and makes your net investment $321.30 ($500 – $178.70).  If SQ closes above $210 on July 23, both options will expire worthless and your return on the spread would be 56% ($178.70 / $321.30).

Foot Locker (FL) is Running Higher

Wednesday, May 26th, 2021

Pandemic? What pandemic? FL, the ultimate in a brick-and-mortar, mall-based store, has been a monster performer this year. The stock is up a gawdy 50% and has more than doubled since last August. The company reported stellar earnings on Friday before the bell that easily topped expectations. Earnings came in at $1.93 per share compared to the $1.12 consensus analyst estimate. Sales hit $2.15 billion, which made the $1.9 billion estimate look silly. Of course, sales were higher than a year ago during the pandemic. What’s impressive is that FL topped its 2019 Q1 performance as well.

Prior to earnings, the stock dropped nearly 13% in three days after hitting a two-year high on Tuesday. But FL rebounded on Friday, gaining 2%. More importantly, the shares found solid support at their 50-day moving average. This trendline has been instrumental in supporting FL’s nine-month rally. In fact, the stock has closed below the 50-day just twice since late August. Currently, the 50-day sits at 59, while the stock is just below 61. At the current rate of incline, the 50-day should be around 60, which is where we’re playing an aggressive credit spread.

If you agree that FL will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above $60 through expiration in eight weeks.

Buy to Open FL 16Jul 57.5 Put (FL210716P57.5)
Sell to Open FL 16Jul 60 Put (FL210716P60) for a credit of $1.00 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when FL was trading just below $61. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $98.70. This trade reduces your buying power by $250 and makes your net investment $151.30 ($250 – $98.70).  If FL closes above $60 on July 16, both options will expire worthless and your return on the spread would be 65% ($98.70 / $151.30).

Electronic Arts (EA) Post-Earnings Slump is an Opportunity

Monday, May 17th, 2021

On Tuesday after the bell, EA stepped into the earnings confessional. Results on the top and bottom lines lagged analyst expectations, but bookings came in higher than company estimates. Moreover, EA upped its guidance for FY 2022, as user base growth achieved during the pandemic is expected to remain intact. The Street appeared confused by the report, as the news was greeted by a mix of modest target price increases and decreases. However, the important number is the average $163 target, which is 17% above Friday’s closing price. 

Though the Street appeared mostly relieved that EA’s post-lockdown slump was less than feared, the stock fell for three straight days. But the fall covered a modest 2%, as daily lows were well supported by the 50-day moving average. This trendline, which is turning higher for the first time in two months, sits above the $137 level. Meanwhile, the 200-day moving average is in place above $135. With this solid downside support in play, we are looking at a credit spread with the short strike below the 200-day at the 135 strike.

If you agree that EA will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above $135 through expiration in five weeks.

Buy to Open EA 18Jun21 130 Put (EA210618P130)
Sell to Open EA 18Jun21 135 Put (EA210618P135) for a credit of $1.20 (selling a vertical)

This credit is $0.06 less than the mid-point of the option spread when EA was trading at $138.62. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $118.70. This trade reduces your buying power by $500 and makes your net investment $381.30 ($500 – $118.70).  If EA closes above $135 on June 18, both options will expire worthless and your return on the spread would be 31% ($118.70 / $381.30).

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