Earnings Growth To Fuel Further Momentum For Red Hat (RHT)

This week we are featuring a recent addition to the Investor’s Business Daily (IBD) Top 50 List of companies.  We use this list in one of our portfolios to spot outperforming stocks and place spreads which will profit if the upward momentum continues.  Actually, the stock can even fall a little for the maximum gain to be realized on these spreads.

The 10 Terry’s Tips option portfolios enjoyed another stellar week last week, gaining an average of 1.2%, and making the ytd number a whopping 78% for all the portfolios combined.  This is over 7 times as great as the 2017 results for the market (SPY) which is up about 11%.

Terry

Earnings Growth To Fuel Further Momentum For Red Hat (RHT)

Red Hat reported above-consensus earnings in the past week and several analysts have refreshed their upside targets since.  Here are two of them – Red Hat PT raised to $128 at BMO Capital and Red Hat PT Raised to $117 at JPMorgan Following 2Q.

Red Hat’s earnings report triggered a push higher above a notable horizontal level at $108.04 that held the stock price lower on several attempts throughout the month prior to the report.  RHT also regained the 20-period daily moving average on the back of the same surge and hit fresh 52-week highs.  The horizontal level and the moving average fall in close proximity to each other, offering a strong confluence of downside support.

RHT Chart October 2017

*source Tradingview.com

If you agree there’s further upside ahead for Red Hat, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next seven weeks.

Buy To Open RHT 17Nov17 105 Puts (RHT171117P105)
Sell To Open RHT 17Nov17 110 Puts (RHT171117P110) for a credit of $1.45 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when RHT was trading near $111.  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 $143 and your broker would charge a $500 maintenance fee, making your investment $357 ($500 – $143).  If RHT closes at any price above $110 on November 17, 2017, both options would expire worthless, and your return on the spread would be 40% (325% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates September 28, 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.  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.

Happy trading,

Terry