This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 companies. In one of our portfolios, we use this list to find stocks that have displayed strong upward momentum and place option trades that take advantage of the trend.
Consider NutriSystem (NTRI) After The Price Correction
Several research firms have recently upgraded their rating on NutriSystem, the following article provides some details – NutriSytem Inc Receives Consensus Rating of “buy” from Brokerages. As well, some big players upped their exposure to NutriSystem in the first quarter which is discussed in this article – Swiss National Bank Boosts Stake In NutriSystem Inc.
From a technical perspective, NTRI broke higher from a bullish flag pattern in late June to signal that a seven-week correction from a high posted in April may have completed.
The stock has been trending higher since 2013 and an acceleration of upside momentum is seen from early 2016. NutriSystem broke above the 100-day moving average in the second quarter of 2016 and aside from a very brief dip below the indicator in January and June this year, the stock has held above it.
If you agree there’s further upside ahead for NutriSystem, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next six weeks.
Buy To Open NTRI 18Aug17 45 Puts (NTRI170818P40)
Sell To Open NTRI 18Aug17 50 Puts (NTRI170818P45) for a credit of $1.48 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when NTRI was trading near $52. Unless the stock rallies quickly from here, you should be able to get close to this amount.
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $146 and your broker would charge a $500 maintenance fee, making your investment $354 ($500 – $146). If NTRI closes at any price above $50 on August 18, 2017, both options would expire worthless, and your return on the spread would be 41% (355% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
IBD Underlying Updates July 7, 2017
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 80% in the first six 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.