This Trade Targets a 100% Potential Return by March 19

Option Trade Of The Day: Box Inc (BOX)

My bull and bear scans from last night showed only six bullish stocks and 121 bearish stocks for a net of -115. That is the biggest negative single day reading since November ’16.

[hana-code-insert name=’adsense-article’ /]A great number of the stocks on the bearish list have really good fundamental stats and are only showing up due to how overbought they are.

However, there were others with poor fundamentals.

One such stock is Box, Inc. BOX has been in business since 2005 and operates a cloud-based content management platform.

Despite being in business for 12 years, the company shows negative numbers across the board on the efficiency marks- negative ROE, negative profit margin and negative operating margin.

The stock has been trending higher in recent months, but that is a case of a rising tide lifting all boats it would appear. Two things that jumped out at me on the chart were the overbought levels on the RSI and stochastic readings. While the stochastic readings have been known to stay in overbought territory for extended periods, the RSI tends to mark reversals better. It also caught my attention that the stock is overbought without reaching previous high.

The pattern in yesterday’s candlestick is known as a bearish engulfing pattern. It occurs when the previous day is an up day and then the stock moves down the next day with the enter body of the second day engulfing the body of the previous day. In other words the stock moves up on day one, opens higher on day two and then falls and closes below the open from day one. It is considered to be a bearish pattern.

Buy to open the Mar18 23 strike puts on BOX at $1.65 or better. This is a relatively aggressive trade due to how little intrinsic value there is in these options, but I can see the stock dropping down below $20 and possibly catching support at its 52-week moving average. Even if that is the case, these options can double without the stock having to break through that support. I would target a gain of 100% on the options and I would look to close out the trade before the company reports earnings on February 27. If they are up big but haven’t hit the target yet, you can always take the gains on half the trade and leave the other half open to play the earnings report with a reduced risk. I would use the $23.50 level as a stop-loss point for this trade.

— 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.