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.
The actual Terry’s Tips portfolio that trades these weekly suggestions has now gained 106% for the first six months of 2018. We have declared a 2-for-1 split so new followers can get in for about $5000 where it started out the year instead of the $10,311 it is worth today after paying all commissions. Paying Terry’s Tips subscribers can follow these trades on their own or have positions automatically put into their account through the Auto-Trade service offered by thinkorswim.
Kemet Corporation (KEM) Poised to Retest 52-Week High
Kemet stock has rallied since its earnings report in late May and these two articles suggest the stock price could continue higher – Keep eye on 52-week high price – Kemet Corporation and Is the options market predicting a spike in Kemet stock?
KEM rose above a significant level last week, suggesting that bulls are firmly in control. The horizontal level resides at $21.20 and served as a barrier on two attempts earlier this year, with each prior attempt resulting in a correction lower below $18. The stock now trades at a fresh high for the year with sights on the 52-week high near $27.
If you agree there’s further upside ahead for KEM, consider this trade which is a bet that the stock will continue to advance over the next six weeks, at least a little.
Buy To Open KEM 20JUL18 20 Puts (KEM180720P20)
Sell To Open KEM 20JUL18 23 Puts (KEM180720P23) for a credit of $0.92 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when KEM was trading near $23. 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 $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $89.50 and your broker would charge a $300 maintenance fee, making your investment $210.50 ($300 – $ 89.50). If KEM closes at any price above $23 on July 20, both options would expire worthless, and your return on the spread would be 43% (413% 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.