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.
A few biotech companies are rallying as investors are encouraged by the prospect of a Coronavirus vaccine, and EBS is one of them. The following two articles discuss the matter in detail – Emergent (EBS) Begins Development of Treatments for COVID-19 and Emergent BioSolutions CEO Talks Coronavirus Vaccine Development.
EBS is an outperformer and posted its highest weekly close since 2018 in the past week. In the process, the stock has overtaken a major horizontal resistance level at $66 that proved to be a hurdle on a few attempts between 2019 and 2020. On a weekly chart, the stock has posted a strong upside candle that erases several weeks of declines which can be seen as a bullish signal. Further, the stock is in a clear uptrend since bottoming out in late August and the recent upward momentum suggests the bullish trend remains intact.
If you agree there’s further upside ahead for EBS, consider this trade which is a bet that the stock will continue to advance over the next five weeks, at least a little bit.
Buy To Open EBS 17APR20 65 Puts (EBS200417P65)
Sell To Open EBS 17APR20 70 Puts (EBS200417P70) for a credit of $1.78 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when EBS was trading near $69. 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 $176.70 and your broker would charge a $500 maintenance fee, making your investment $323.30 ($500 – $176.70). If EBS closes at any price above $70 on April 17, both options would expire worthless, and your return on the spread would be 55% (627% 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.