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. The actual portfolio at Terry’s Tips which trades these weekly ideas has gained 220% so far in 2019. Of course, we don’t expect this kind of success to persist, but so far we feel quite good about our chances.
By the way, we have another actual portfolio which trades an entirely different idea each week (one based on dividend payments), and it has notched 11 consecutive gains with nary a loss. In this portfolio, spreads are almost always closed out in one week after placing them.
Will Ulta Beauty (ULTA) Continue Higher Following the Impressive Rally?
ULTA is already up a significant amount this year and these two analysts still expect further upside – Despite Rising 50%, Ulta Beauty Is Still A Buy and Ulta Up 10.3% Since Last Earnings Report: Can It Continue?
The stock is seen consolidating sideways over the past few weeks and was last seen testing a confluence of support. The support area consists of prior resistance that followed the earnings-inspired gap up in the middle of March as well as the 20-day moving average. In the event the stock dips below this support confluence, further support is seen from the lower bound of a rising trend channel that originates from a low posted near the end of December.
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 six weeks, at least a little.
Buy To Open ULTA 24MAY19 342.5 Puts (ULTA190524P342.5)
Sell To Open ULTA 24MAY19 345 Puts (ULTA190524P345) for a credit of $1.14 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ULTA was trading near $345. 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 $111.50 and your broker would charge a $250 maintenance fee, making your investment $138.50 ($250 – $111.50). If ULTA closes at any price above $345 on May 24, both options would expire worthless, and your return on the spread would be 81% (758% 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.