Pandemic? What pandemic? FL, the ultimate in a brick-and-mortar, mall-based store, has been a monster performer this year. The stock is up a gawdy 50% and has more than doubled since last August. The company reported stellar earnings on Friday before the bell that easily topped expectations. Earnings came in at $1.93 per share compared to the $1.12 consensus analyst estimate. Sales hit $2.15 billion, which made the $1.9 billion estimate look silly. Of course, sales were higher than a year ago during the pandemic. What’s impressive is that FL topped its 2019 Q1 performance as well.
Prior to earnings, the stock dropped nearly 13% in three days after hitting a two-year high on Tuesday. But FL rebounded on Friday, gaining 2%. More importantly, the shares found solid support at their 50-day moving average. This trendline has been instrumental in supporting FL’s nine-month rally. In fact, the stock has closed below the 50-day just twice since late August. Currently, the 50-day sits at 59, while the stock is just below 61. At the current rate of incline, the 50-day should be around 60, which is where we’re playing an aggressive credit spread.
If you agree that FL will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above $60 through expiration in eight weeks.
to Open FL 16Jul 57.5 Put (FL210716P57.5)
Sell to Open FL 16Jul 60 Put (FL210716P60) for a credit of $1.00 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when FL was trading just below $61. 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 $98.70. This trade reduces your buying power by $250 and makes your net investment $151.30 ($250 – $98.70). If FL closes above $60 on July 16, both options will expire worthless and your return on the spread would be 65% ($98.70 / $151.30).