This Trade Targets a 75% Return in About Two Months

Option Trade of the Day: Sabra Healthcare REIT (SBRA)

The market got the Goldilocks employment report that it was looking for on Friday. The job growth was better than expected, but the employment rate didn’t drop and average hourly earnings didn’t jump. This is exactly what investors wanted to see.

The concerns have been that the unemployment rate is getting too low which would cause average hourly earnings to rise and create inflation pressures.

By seeing job growth without a big drop in the unemployment rate or a big jump in the earnings rate, the report was “just right” and that allowed the market to jump sharply.

Even with the big jump by the indices, my scans generated more bearish signals than bullish signals (29-22) and that caused my barometer to dip back in to negative territory.

Even though the scans were relatively balanced, it was a bearish signal that caught my eye and it was Sabra Healthcare REIT (Nasdaq: SBRA).

The fundamentals on SBRA aren’t that bad, but the sentiment toward the stock just hit its highest reading of the past year on Wednesday.

The chart shows a downward-sloped trend channel with the stock hitting the upper rail of the channel presently. There is also a cyclical pattern to the chart as every three months the stock seems to peak. Just look at the peaks in June, September and December. The sentiment readings peak at these same times.

Buy to open the July18 20 strike puts on SBRA at $2.75 or better. These options expire on July 20. Normally I try to target a gain of at least 100% when buying options, but given the pattern to this one, I am targeting 75%. I would also suggest a timed closeout with mid-May being the longest I would hold the option. Each of the cycles in the chart has been two months in length and that takes us out to May. I would set a stop at the $18.80 price as well.

— Rick Pendergraft

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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.