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.
ServiceNow stock advanced sharply higher in the past week after earnings came in better than expected. Here is what two analysts have to say about the recent earnings report – Service Now’s (NOW) Q4 Earnings Beat, Revenues Rise Y/Y and ServiceNow (NYSE:NOW) PT Raised to at Jefferies Financial Group.
The earnings report in the past week has triggered a technical breakout in NOW which trades at all-time highs. The technical charts suggest the upward momentum will continue while the stock holds above the breakout point at $319. The upper bound of a rising trend channel is within proximity and this might trigger a near-term consolidation while an upward break of it would be indicative of rising upward momentum.
If you agree there’s further upside ahead for NOW, 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 NOW 13MAR20 330 Puts (NOW200213P330)
Sell To Open NOW 13MAR20 335 Puts (NOW200213P335) for a credit of $1.89 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when NOW was trading near $338. 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 $1.30 per spread. Each contract would then yield $187.70 and your broker would charge a $500 maintenance fee, making your investment $312.30 ($500 – $187.70). If NOW closes at any price above $335 on March 13, both options would expire worthless, and your return on the spread would be 60% (562% 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.