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 spot outperforming stocks and place spreads that take advantage of the momentum.
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Electronic Arts (EA) Stock Appears Undervalued After Analyst Upgrades
Analysts at Goldman Sachs are optimistic of the gaming industry and have initiated Electronic Arts with a Buy and a $136 price target. Several other analysts have rated the stock as a Buy including the Jefferies Group who have recently restated their rating with a $135 price target.
From a technical perspective, EA has recently scaled above a notable hurdle at $116 which had capped gains in June. Dips towards the level have been met with buyers since the middle of September, establishing the horizontal level as strong support. A rising trend channel has encompassed price action since late July and the lower bound of the channel offers additional support slightly ahead of the horizontal level.
If you agree there’s further upside ahead for Electronic Arts, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next six weeks.
Buy To Open EA 20Oct17 110 Puts (EA171020P110)
Sell To Open EA 20Oct17 115 Puts (EA171020P115) for a credit of $1.35 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when EA was trading near $118. 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 $133 and your broker would charge a $500 maintenance fee, making your investment $367 ($500 – $133). If EA closes at any price above $115 on October 20, 2017, both options would expire worthless, and your return on the spread would be 36% (314% 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. It is interesting to see that MA was removed from the list this week. This seems unusual since the stock moved up almost $4 last week. This is the stock that is traded in the Terry’s Tips portfolio called Rising Tide. This portfolio has gained 120% so far in 2017 while MA has gained 31%. We have almost done 4 times as great as the stock price increase.
As with all investments, you should only make option trades with money that you can truly afford to lose.