DELL reported quarterly results Thursday after the bell that easily beat expectations on both revenue and earnings. The company shipped more than 50 million PCs in 2020, a record high, taking advantage of the higher demand for home-based activities amid the pandemic. In response, several analysts raised their price targets, ranging up to $101, $20 higher than Friday’s close.
The strong results kept DELL’s stock price headed in the right direction. For the week, the stock ticked slightly higher, which is impressive given the Nasdaq’s 5% plunge. In the intermediate term, the stock has been riding along its rising 20-day moving average since crossing above it more than three months ago. Note that the short strike of our credit spread (red line below) lies below the 20-day and the recent lows near $78, so this dual support would need to break for the spread to move into the money.
If you agree DELL’s uptrend will continue, or at least stay above $78, consider the following trade that relies on the stock remaining above $77.50 through expiration in seven weeks.
Buy to Open DELL 16Apr21 75 Put (DELL210416P75)
Sell to Open DELL 16Apr21 77.5 Put (DELL210416P77.5) for a credit of $0.90 (selling a vertical)
This credit is $0.03 less than the mid-point of the option spread when DELL was trading near $81. 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 $88.70. This reduces your buying power by $250 and makes your investment $161.30 ($250 – $88.70). If DELL closes above $77.50 on April 16, both options will expire worthless, and your return on the spread would be 55% ($88.70 / $161.30), or 408% annualized.
As with all investments, you should only make option trades with money that you can truly afford to lose.