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TERRY’S TIPS STOCK OPTIONS TRADING BLOG
June 27, 2022
Darden Restaurants (DRI) reported earnings this week that beat on both revenue and profits. But the owner of such popular chains as Olive Garden, LongHorn Steakhouse and Capital Grille was beset by higher food, beverage and labor costs even as customers are more comfortable eating out again.
Analysts weighed in with a plateful of target price decreases, although there were no rating downgrades. This has been common for most stocks, as analysts re-adjust their targets amid the 2022 swoon. Nevertheless, some targets are now barely above the current share price, which does not inspire confidence about DRI’s near-term price action.
The stock reacted with a small increase on Thursday and then popped 3.6% on Friday. But most stocks surged on Friday, so it doesn’t appear that earnings gave DRI a boost. Although the stock is up 8% off a 52-week low hit last week, it is bumping into its 20-day moving average at the 120 level (red line in chart). The 50-day moving average lies overhead at the 125 level (blue line). Although DRI has managed to overtake the 50-day at times, it ultimately retreats into a tailspin. Given this history, we’re using a bearish call credit spread with the short call strike (green line) sitting right on the 50-day.
If you agree that DRI will continue its overall downtrend, consider the following trade that relies on the stock staying below $125 through expiration in eight weeks.
Buy to Open DRI 19Aug 130 call (DRI220819C130) Sell to Open DRI 19Aug 125 call (DRI220819C125) for a credit of $1.50 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when DRI was trading at $120. Unless the stock drops quickly from here, you should be able to get close to this amount.
Your commission on this trade should be no more than $1.30 per spread. Each spread would then yield $148.70. This trade reduces your buying power by $500 and makes your net investment $351.30 ($500 – $148.70) for one spread. If DRI closes below $125 on August 19, both options will expire worthless and your return on the spread would be 42% ($148.70/$351.30).
Roku (ROKU) is a stock many believe is in play as a takeover candidate. Netflix and Disney are potential suitors, among others. Whatever the rumor or sentiment, the stock has been flat for the past seven weeks, which is saying something. In fact, since April 27, ROKU is down 2.7% while QQQ has fallen more than 13%.
There’s no denying that ROKU has been a spectacular flop for the past year. The shares are down a whopping 83% from their July 2021 high. But the stock has held up well over the past couple of months with takeover rumors in the air. It may not be advancing, but it’s not falling either. Moreover, the stock appears to have found solid support in the 72-73 area, the site of a two-year low.
One way to see how the market feels about a stock is by looking at equidistant out-of-the-money put and call prices. Currently, calls are trading for more than their corresponding puts, suggesting that the market sees more risk to the upside. That is highly unusual in this market, where most everything has richer put prices. We are therefore trading a put credit spread with the short put strike below the recent two-year low level.
If you agree that ROKU is in play and will continue sideways at worst, consider the following trade that relies on the stock staying above $70 through expiration in six weeks. Note that ROKU is scheduled to report earnings the day before expiration.
Buy to Open ROKU 29Jul 65 put (ROKU220729P65) Sell to Open ROKU 29Jul 70 put (ROKU220729P70) for a credit of $1.50 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when ROKU was trading at $82.42. Unless the stock surges quickly from here, you should be able to get close to this amount.
Your commission on this trade should be no more than $1.30 per spread. Each spread would then yield $148.70. This trade reduces your buying power by $500 and makes your net investment $351.30 ($500 – $148.70) for one spread. If ROKU closes above $70 on July 29, both options will expire worthless and your return on the spread would be 42% ($148.70/$351.30).
Target
(TGT) reported earnings before the bell on Wednesday that beat estimates on
both revenue and profits. The company also expects its fiscal Q4 comparable
sales growth to be higher than previous forecasts. Moreover, TGT claimed the
supply chain mess has not been an issue – store shelves are full and ready for
the holiday buying onslaught.
Analysts
were mostly bullish on the report, giving TGT several target price increases
(there was one lower price). One went as high as $350, a 38% premium to
Friday’s closing price. The stock price was not rewarded, however. The shares
dropped 4.7% on Wednesday and slid further the rest of the week. However, this
was a common theme among several retailers, including Walmart (WMT). In fact,
the overall retail sector was lower for the week.
The pullback dropped the shares to just above their 50-day moving average (blue line in chart). This trade is thus a bet that TGT will regain its footing and stay above the 50-day as holiday sales numbers – that are predicted to be robust – start rolling in. The short 245 strike (red line) of our put credit spread is below the 50-day, relying on trendline support to hold through expiration.
If
you agree that TGT will stay atop its 50-day moving average line in chart),
consider the following trade that relies on the stock remaining above 245 (through expiration in six weeks.
Buy
to Open TGT 31Dec 240 put (TGT211231P240) Sell to Open TGT
31Dec 245 put (TGT211231P245) for a credit of $1.60 (selling a vertical)
This
credit is $0.02 less than the mid-point
of the option spread when TGT was trading around $251. Unless the stock rises
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 $158.70. This
trade reduces your buying power by $500 and makes your net investment $341.30
($500 – $158.70) for one spread. If TGT
closes above $245 on December 31, both options will expire worthless and your return on the spread would
be 46% ($158.70/$341.30).
Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad
This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).
Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options
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