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.
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DPZ recently broke above a horizontal level at $299 which is considered to be significant as the same level served the hold the stock lower on several attempts since the summer last year. The initial break higher followed its earnings report last month. The stock has pulled back since then and is currently being held higher by the same price point as well as the 200-day moving average. From a technical point of view, this is an area where the stock can reverse back into an uptrend after pulling back over the last month.
If you agree there’s further upside ahead for DPZ, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.
Buy To Open DPZ 24APR20 295 Puts (DPZ200424P295)
Sell To Open DPZ 24APR20 300 Puts (DPZ200424P300) for a credit of $2.23 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when DPZ was trading near $300. 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 $1.30 per spread. Each contract would then yield $221.70 and your broker would charge a $500 maintenance fee, making your investment $278.30 ($500 – $221.70). If DPZ closes at any price above $300 on April 24, both options would expire worthless, and your return on the spread would be 80% (913% 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.