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.
Ulta Beauty (ULTA) Nears Record Highs, Will it Break Upward?
After an impressive run in the first half of the year, several analysts still see the potential for further upside in ULTA. Take a look at what these analysts have to say – Ulta Beauty – Consensus Indicates Potential 4.2% Upside and Why Ulta Beauty Stock Gained 42% So Far in 2019.
ULTA is actually seen approaching a significant resistance level at $359. There are a few indicators that suggest that the stock will break higher from here. First, the stock posted a bullish engulfing candle in the past week. This momentum seems to suggest that ULTA is ready to continue rallying. Second, the stock held above an important support level in May that is found at $315. That level held the stock lower in 2017 and 2018. The strong presence of buyers and the steady bid from the level shows that the stock is well in demand. Lastly, when a stock lingers around a resistance level without a strong show of selling, it usually suggests an upward break. Especially when there is a strong trend in place as is the case for ULTA.
If you agree there’s further upside ahead for ULTA, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.
Buy To Open ULTA 16AUG19 350 Puts (ULTA190816P350)
Sell To Open ULTA 16AUG19 355 Puts (ULTA190816P355) for a credit of $2.03 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ULTA was trading near $356. 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 $200.50 and your broker would charge a $500 maintenance fee, making your investment $299.50 ($500 – $200.50). If ULTA closes at any price above $355 on August 16, both options would expire worthless, and your return on the spread would be 67% (764% 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.