Software developer (QuickBooks, TurboTax) Intuit (INTU) reported earnings on Aug. 24 that handily beat estimates on all fronts. Earnings came in at $1.97 per share, topping the analyst forecast by 24%, while quarterly revenue of $2.56 billion beat the estimate by 10%. The company also raised its quarterly and annual revenue and earnings guidance above expectations. To top it off, INTU raised its dividend and approved a new $2 billion repurchase authorization.
The Street clearly loved the report, as the stock was hit with several large target price increases (one raised the price 27%). The average new target price after these raises was around the $640 mark, which is 13% above INTU’s closing price on Friday.
The stock price took the news and target increases in stride, though, with no change on Thursday after the report. On Friday, the stock resumed its huge rally with a 2.4% gain. INTU is up nearly 50% in 2021, with most of that gain coming in the past 3-1/2 months. The shares have been riding along their 20-day moving average, a trendline that has not allowed one daily close below it since mid-May. The 20-day is currently at 541 but should cross above the 550 level in less than two weeks at its current pace. This is also the site of the short put strike of our credit spread.
If you agree that INTU will continue its rally along the 20-day moving average, consider the following trade that relies on the stock remaining above 550 through expiration in seven weeks.
to Open INTU 15Oct 540 put (INTU211015P540)
Sell to Open INTU 15Oct 550 put (INTU211015P550) for a credit of $2.80 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when INTU was trading at $566. 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 $278.70. This trade reduces your buying power by $1,000 and makes your net investment $721.30 ($1000 – $278.70). If INTU closes above $550 on October 15, both options will expire worthless and your return on the spread would be 39% ($278.70 / $721.30).