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. Our actual portfolio carried out at Terry’s Tips which trades these weekly ideas has gained 114% in the first five weeks of 2019. This portfolio also made over 100% in 2018 and we withdrew the starting investment amount so that we are playing entirely with profits at this time. Of course, there is no certainty that we can duplicate this success in the future, but we feel pretty good about our prospects.
Can Microchip Technology (MCHP) Maintain its Post-Earnings Momentum?
Microchip Technology saw its stock price rally just over 10% prior to pulling back as investor optimism grew following their earnings report in the past week. Just to be clear, the report was not as upbeat as expected. Actually, the stock had turned down initially, but it was a prediction from the company Chief Executive that caused investors to change their view and start buying. It’s a rather interesting turn of events and the following two articles explain why the markets have put so much weight to his prediction, and why the stock may continue to rise from here – Microchip’s stock soars after CEO calls for a bottom, and he’s been right before and Microchip: A Bottom Is Possibly In.
The push higher following earnings led to a signifcant technical break as the stock was pressed against a confluence of resistance prior to it. Resistance comes from the 200-day moving average as well as a declining trendline drawn from the June top. The stock price has pulled back a bit from horizontal resistance found at $89.20 that was a prior low and prior resistance following a gap down last summer. Support is found just above $85. In the even the support level does not hold, stronger support is found at the prior breakout point. Considering the significance of the technical break, bulls are likely to defend any dips in the near-term.
If you agree there’s further upside ahead for MCHP, 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 MCHP 15MAR19 85.00 Puts (MCHP190315P85.00)
Sell To Open MCHP 15MAR19 87.50 Puts (MCHP190315P87.50) for a credit of $1.10 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MCHP was trading near $87.50. 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 $355.50 and your broker would charge a $1000 maintenance fee, making your investment $644.50 ($1000 – $355.50). If MCHP closes at any price above $87.50 on March 15, both options would expire worthless, and your return on the spread would be 55% (627% 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.