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.
PANW rallied to fresh all-time highs after first-quarter earnings and revenue surpassed analyst expectations. In addition to the earnings report, Palo Alto Networks is acquiring a cybersecurity company that stands to boost its competitive edge. The following two articles provide more detail – BofA Turns Bullish On Palo Alto Networks After Q1 Beat and Palo Alto Networks: Why Expanse Is A Game Changer.
Monday’s earnings report offered the catalyst for a bullish break of a flag pattern that had been forming for several months. The technical break signals a bullish continuation of the trend that took place in the second and third quarter. PANW has shown a steady rise in upward momentum since the start of the month and investors may look to continue buying on shallow dips.
If you agree there’s further upside ahead for PANW, consider this trade which relies on the stock remaining above the $290 level through the expiration in six weeks.
Buy To Open PANW 31DEC20 285 Puts (PANW201231P285)
Sell To Open PANW 31DEC20 290 Puts (PANW201231P290) for a credit of $2.05 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when PANW was trading near $292. 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 $203.70. This reduces your buying power by $500 and makes your investment $296.30 ($500 – $203.70). If PANW closes at any price above $290 on December 31, both options will expire worthless, and your return on the spread would be 69% ($203.70 / $296.30), or 646% 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.