DHR – a medical diagnostics and research company – reported earnings Thursday morning that blew away estimates. Adjusted earnings came in at $2.52 per share compared with 81 cents a year earlier and the analyst estimate of $1.76. Revenue soared 58% from a year earlier, easily surpassing expectations. The company was bolstered by strength in its core business and by products related to Covid-19 vaccinations, therapeutics and diagnostics. Analysts were clearly impressed, as the company received a slew of target price increases ranging from $270 to $315 (the stock closed Friday at $260).
The earnings news caused DHR to pop more than 6% in two days to hit record highs both days. More importantly, however, this strength propelled the shares above stubborn resistance at the $248 level. This area defined tops in November, January, February and in the week before earnings. With clear sailing ahead and strong fundamentals at its back, DHR should stay above the trading range that dominated its price action for the past six months.
If you agree that DHR is ready for a new uptrend, consider the following trade that relies on the stock remaining above $250 through expiration in eight weeks.
Buy to Open DHR 18Jun21 240 Put (DHR210618P240)
Sell to Open DHR 18Jun21 250 Put (DHR210618P250) for a credit of $2.00 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when DHR was trading at $260. 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 $198.70. This trade reduces your buying power by $1,000 and makes your net investment $801.30 ($1000 – $198.70). If DHR closes above $250 on June 18, both options will expire worthless and your return on the spread would be 25% ($198.70 / $801.30).
As with all investments, you should only make option trades with money that you can truly afford to lose.
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