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 portfolios to find outperforming stocks and place spreads that profit if the upward momentum continues for about four more weeks. Actually, the stock can even decline a little for the maximum gain to be realized on these spreads.
2017 has been a good year for the market. The S&P 500 is up almost 11%. The 10 options portfolios carried out by Terry’s Tips have gained a composite average of 75.6% so far this year (after paying all the commissions). Our strategies have gained almost 7 times as much as the market has picked up. Isn’t it about time that you learned more about the wonderful world of options?
Advanced Energy Industries (AEIS) Offers An Attractive Entry Point
Several analysts are expecting AEIS to continue higher. Needham analyst Edward Monk recently reiterated a Buy rating and set a price target of $80. Another analyst has made a strong fundamental case for further upside in the stock price in his article posted at Seeking Alpha, highlighting impressive growth, no long-term debt, and a strong balance sheet.
The technical outlook for AEIS suggests the stock is ready to resume higher. The stock recently climbed back above a significant horizontal level at $72.88 which was major resistance in 2000 on a monthly chart. A rising trendline that originates from a low posted in early July has held declines and a declining trendline that connects the top from July with a high posted in early September has been breached to the upside. The same declining trendline held the correction last week and there was a great deal of momentum behind the recovery from it.
If you agree there’s further upside ahead for Advanced Energy, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next four weeks.
Buy To Open AEIS 20Oct17 70 Puts (AEIS171020P70)
Sell To Open AEIS 20Oct17 75 Puts (AEIS171020P75) for a credit of $1.25 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when AEIS was trading near $76. Unless the stock rallies quickly from here, you should be able to get close to this amount.
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $123 and your broker would charge a $500 maintenance fee, making your investment $377 ($500 – $123). If AEIS closes at any price above $75 on October 20, 2017, both options would expire worthless, and your return on the spread would be 32% (474% 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.