This Trade Targets a 100%-Plus Potential Return by May

Editor’s note: In this new daily column, Rick Pendergraft shares one of his favorite option trades for the current market. Each trade offers defined risk and typically targets 100%-plus potential returns. Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis.

Option Trade Of The Day: Crown Castle International (CCI)

Over the last few nights, my scans have been producing a disproportionate number of bearish signals to bullish signals.

In fact, there have been 165 bearish signals and only 28 bullish signals over the course of the last two days.

While I am not necessarily bearish at this time, the high number of bearish readings is cause for concern as there are so many stocks and ETFs that are overbought.

I try not to let the overall numbers influence how I view the charts each night, but I also always try to have some balance in my options portfolio.

I never want to have all bullish or all bearish positions. Despite the large number of bearish signals, I have a bullish pick for you today.

Crown Castle International (CCI) is the nation’s largest provider of shared wireless infrastructure. The company owns 40,000 towers and over 60,000 miles of fiber supporting smart cells that provide wireless carriers with their infrastructure. The company is headquartered in Houston, Texas.

The main factors behind this trade idea are the chart and the sentiment. The chart shows how a trend channel has been dictating trade over the last 15 months and the stock is just above the lower rail of the channel at this time.

We see that the stock has been consolidating over the last few months and it is doing so above the $106 level which had provided some resistance in the past.

If you would take notice of the parabolas on the chart above, these are marking the extreme lows in the sentiment, or bearish sentiment, toward the stock over the past year. Last Friday was among the ten lowest readings in the sentiment for the past year.

The combination of the pattern in the chart and the bearish sentiment toward the stock make me think the stock is getting ready to rally again. The previous rallies off the lower rail of the channel and low sentiment readings led to gains of at least 10% in each instance and I look for a similar rally this time around.

Buy to open, the Apr18, 105 strike calls on CCI. These options expire on April 20. The option’s closing ask price last night was $5.50 and it is $2.68 in the money, so you are paying approximately half for intrinsic value and half for time premium. A 10% rally from the current price would put the stock up around $18.50. Should the stock dip a little further and get closer to the lower rail and the flat-line support at $106 and then rally 10%, the stock would be at $116.60 and this option would be worth $11.60, just slightly more than double the current price. If you so choose, you might even wait to see if the stock dips a little more before buying these options. If it starts to rise immediately, you may end up paying a higher price and in that case you would need to lower your target profit, percentage wise that is.

— Rick Pendergraft

OPTIONS DISCLAIMER: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, investorservices@theocc.com.

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.