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.
Palo Alto Networks (PANW) Breaks to Record Highs, What’s Next?
Palo Alto Networks has seen a remarkable rise in its stock price over the last few years and several articles on The Motley Fool suggest there will be further upside. Here are the latest two – Palo Alto Networks’ Bull Run Probably Won’t Be Ending Anytime Soon and Forget Cryptocurrencies: You’re Better Off Buying These 3 Stocks.
On a daily chart, PANW appears to be consolidating in a range since around the middle of May. However, a closer look reveals a notable technical break. Range support near $200 wasn’t just important because of the psychological implications, the level also triggered a sharp turn in 2015 that led to a two-year correction. Although there have been marginal breaches below the level since the stock price initially climbed above it a few months ago, bears have been unable to drive the stock price below it on a sustained basis. To the upside, resistance near $216 had capped rallies in June but the recent bullish break of the level suggests the uptrend has resumed.
If you agree there’s further upside ahead for PANW, consider this trade which is a bet that the stock will continue to advance over the next six weeks, or at least not decline very much.
Buy To Open PANW 24AUG18 212.5 Puts (PANW180824P212.5)
Sell To Open PANW 24AUG18 215 Puts (PANW180824P215) for a credit of $0.95 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when PANW was trading near $216. 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 $92.50 and your broker would charge a $250 maintenance fee, making your investment $157.50 ($250 – $92.50). If PANW closes at any price above $215 on August 24, both options would expire worthless, and your return on the spread would be 59% (552% 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.