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.
Xilinx (XLNX) Surges to Fresh Yearly Highs, What’s Next?
Xilinx has been receiving a lot of media attention as of late, these two articles shed some light on what analysts are expecting from the company – What Makes Xilinx a Strong Momentum Stock: Buy Now? And Has Xilinx Outpaced Other Computer and Technology Stocks This Year?
XLNX reversed sharply higher a few weeks back after their earnings report exceeded expectations. Since then, the stock price regained it’s 20-day moving average, and more importantly, broke to a fresh 18-year high to clearly signal that bulls are in control. A consolidation has taken place over the past week which is common following an important techincal break and most often precedes a continuation in the direction of the trend.
If you agree there’s further upside ahead for XLNL, 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 XLNL 21DEC18 82.5 Puts (XLNL181221P82.5)
Sell To Open XLNL 21DEC18 85 Puts (XLNL181221P85) for a credit of $1.05 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when XLNL was trading near $86. 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 $102.50 and your broker would charge a $250 maintenance fee, making your investment $147.50 ($250 – $102.50). If XLNL closes at any price above $85 on December 21, both options would expire worthless, and your return on the spread would be 69% (681% 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.