This week we are featuring a company listed on the Investor’s Business Daily (IBD) Top 50 List that has also recently been added to the S&P 500 index. The stock has displayed strong upwards momentum and we look to place spreads that take advantage of this underlying strength.
Align Technology (ALGN) A Buy After Being Added To The S&P 500
Align Technology is the designer and manufacturer of the Invisalign System which they state is the most advanced clear aligner system in the world. Analysts are optimistic of the company’s growth prospects and have recently revised up their expectations. Zacks ranks this stock as a Strong Buy and these analysts have recently raised their targets: Align Technology (ALGN) PT Raised to $175 at Morgan Stanley; Huge At-Home Ortho Opportunity and Leerink Lifts Target On Align Technology, Sees 27% Upside.
From a technical perspective, ALGN boasts a strong uptrend and trades above key technical indicators. On a daily chart, the stock jumped above the 20-day moving average following an earnings report in January and has held above it since.
A rising trend channel has been identified to contain price action since late April and a horizontal level at $145.24 offers additional support to create a confluence near the lower bound of the trend channel.
If you agree there’s further upside ahead for Align Technology, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next seven weeks.
Buy To Open ALGN 18Aug17 140 Puts (ALGN170818P140)
Sell To Open ALGN 18Aug17 145 Puts (ALGN170818P145) for a credit of $1.60 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ALGN was trading near $150. 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 $158 and your broker would charge a $500 maintenance fee, making your investment $342 ($500 – $158). If ALGN closes at any price above $145 on August 18, 2017, both options would expire worthless, and your return on the spread would be 46% (342% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
IBD Underlying Updates June 30, 2017
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. The Terry’s Tips portfolio which places spreads like the above one has gained 80% in the first six months of 2017 in spite of incurring some losses on some of the spreads placed. 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.