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.
Consider Essent Group (ESNT) Following Their Earnings Report
ESNT reported earnings in the past week and despite an early day dip, the stock managed to close higher on the day. The following article provides a view on why the stock could continue higher – 2 Stocks Poised to Thrive in Volatile Times: Essent Group Ltd., Cognex Corporation. Also take a look at this article which discusses the earnings report and the declaration of a new dividend – Essent Group Ltd. Reports Second Quarter 2019 Results & Declares Inaugural Dividend.
There are two significant things going for ESNT from a technical perspective. First, the stock dipped below major support at $45.38 on Friday but managed to close above it. This has resulted in a hammer candle which is a popular candlestick that signals the potential for a reversal. This pattern is not just seen on a daily chart, it is also present on a weekly chart and even on a 4-hour chart. The horizontal level is considered significant as it triggered a major turn last year and as it has acted as support in recent months. The fact that the candlestick pattern printed above such a significant level strengthens it. The other thing going for the stock is that it managed to close higher despite an overall heavy tone in the markets on Friday. This divergence is quite important as the markets look a bit heavy following the price action in the past week.
If you agree there’s further upside ahead for ESNT, consider this trade which is a bet that the stock will continue to advance over the next seven weeks, or at least not decline very much.
Buy To Open ESNT 20SEP19 40 Puts (ESNT190920P40)
Sell To Open ESNT 20SEP19 45 Puts (ESNT190920P45) for a credit of $1.68 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ESNT was trading near $46. 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 $165.50 and your broker would charge a $500 maintenance fee, making your investment $334.50 ($500 – $165.50). If ESNT closes at any price above $45 on September 20, both options would expire worthless, and your return on the spread would be 49% (389% 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.