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 portfolio carried out at Terry’s Tips which trades these spreads has gained 134% in the first six weeks of 2019, making it our most profitable portfolio so far this year. (It also gained over 100% in 2018.) Of course, past results can’t be guaranteed to repeat themselves, but we do feel pretty good about these kinds of spreads, at least when the overall market is moving higher.
Monolithic Power Systems (MPWR) Marches Higher Following Their Earnings Report
Monolithic Power Systems’ stock price has risen steadily since bottoming in late December and several analysts expect more upside, take a look at these two articles to see what the appeal is – Don’t Miss This Stock: Monolithic Power Systems and ROE & Quant Signals Under the Lens For Monolithic Power Systems.
MPWR has made some important technical breaks over the past few weeks to reaffirm its bullish trend. First was a sustained push back above the 200-day moving average. Second was when it climbed over a horizontal level near $132 that has been well respected since last summer as both support and resistance. The significance of this level can be seen on a daily chart but perhaps more clearly on a weekly chart. In the past week the stock made a determined push above the level, taking out the November high at the same time to trade at a fresh 5-month high. A hurdle is seen around $142 and a break of the level would suggest MPWR is headed for record highs.
If you agree there’s further upside ahead for MPWR, consider this trade which is a bet that the stock will continue to advance over the next four weeks, or at least not decline very much.
Buy To Open MPWR 15MAR19 130 Puts (MPWR190315P130)
Sell To Open MPWR 15MAR19 135 Puts (MPWR190315P135) for a credit of $1.23 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MPWR was trading near $138. 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 $120.50 and your broker would charge a $500 maintenance fee, making your investment $379.50 ($500 – $120.50). If MPWR closes at any price above $135 on March 15, both options would expire worthless, and your return on the spread would be 32% (467% 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.