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.
LOW has posted stellar gains in the year thus far. The following two articles discuss what drove the surge since late March as well as reasons why the momentum could continue – Lowe’s Stock Can Keep Rallying Because People Will Be Spending More Time at Home for Longer and 3 Reasons Why Lowe’s (LOW) Is a Great Growth Stock.
From a technical standpoint, LOW has broken higher from an ascending triangle which is a bullish continuation pattern. Support for near-term dips falls at $170.50 which marks the top of the triangle. LOW is up 45% year to date and is one of only a few stocks on the IBD Top 50 list that has broken to a record high in October.
If you agree there’s further upside ahead for LOW, consider this trade which relies on the stock remaining above the $172.50 level through the expiration in five weeks.
Buy To Open LOW 13NOV20 170 Puts (LOW201113P170)
Sell To Open LOW 13NOV20 172.5 Puts (LOW201113P172.5) for a credit of $1.13 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when LOW was trading near $173. 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 $111.70. This reduces your buying power by $250 and makes your investment $138.30 ($250 – $111.70). If LOW closes at any price above $172.50 on November 13, both options will expire worthless, and your return on the spread would be 81% ($111.70 / $138.30), or 924% 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.