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.
TMO shows signs it has reverted to an uptrend and with a strong fundamental outlook, the stock could see a continuation higher. The following two articles provide more details on the fundamentals of the company – Why the Earnings Surprise Streak Could Continue for Thermo Fisher and Is Thermo Fisher Scientific Inc.’s Latest Stock Performance Being Led By Its Strong Fundamentals?
The appeal to TMO from the technical side of things is the resurgence of upward momentum since the start of the new year, TMO has broken higher from a flag pattern that had contained it for most of December and it has rallied above a horizontal level near $482. A small dip can’t be ruled out over the short term but the price action seems to suggest that TMO is ready to resume the prior uptrend with an aim for a new all-time high.
If you agree there’s further upside ahead for TMO, consider this trade which relies on the stock remaining above $510 through the expiration in five weeks.
Buy To Open TMO 19FEB21 500 Puts (TMO210219P500)
Sell To Open TMO 19FEB21 510 Puts (TMO210219P510) for a credit of $3.78 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when TMO was trading near $512. 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 $376.70. This reduces your buying power by $1000 and makes your investment $623.30 ($1000 – $376.70). If TMO closes at any price above $510 on February 19, both options will expire worthless, and your return on the spread would be 60% ($376.70 / $623.30), or 684% 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.