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 portfolios to spot outperforming stocks and place spreads that profit if the momentum continues. Actually, the stock can even decline a little bit to realize the full profit. We use these ideas in one of the ten portfolios that we carry out for paying Terry’s Tips subscribers. These ten actual portfolios have enjoyed an average gain of 118% (after paying commissions) so far in 2017. It has been a very good year.
Consider Paypal (PYPL) Following the Price Correction
Paypal stock prices have risen steadily throughout the year and there have been several price target upgrades recently. BMO Capital Markets has raised their price target to $85.00 and Nomura has increased their target to $82.00. Paypal closed last week at $75.65, suggesting a potential upside of at least 8%.
PYPL has a more consistent and stable trend compared to other stocks on the IBD 50 list. There was a recent price correction and buyers were seen lifting stock prices higher following a brief dip below the 50-period daily moving average and a rising trendline that dates back to June. The rally from the support confluence has resulted in a bullish engulfing candle on a weekly chart.
If you agree there’s further upside ahead for Paypal, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next five weeks.
Buy To Open PYPL 19 Jan18 72.50 Puts (PYPL180119P72.5)
Sell To Open PYPL 19 Jan18 75.00 Puts (PYPL180119P75) for a credit of $0.92 (selling a vertical)This price was $0.02 less than the mid-point of the option spread when PYPL was trading at $75.65. 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 $90 and your broker would charge a $250 maintenance fee, making your investment $160 ($250 – $90). If PYPL closes at any price above $75 on January 19, 2018, both options would expire worthless, and your return on the spread would be 56% (642% 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.