This Trade Targets a 100% Return by April

Option Trade of the Day: Analog Devices (Nasdaq: ADI)

Yesterday was yet another crazy day in the market with the S&P down almost 56 points and then rallied to close 46 points higher for a swing of over 100 points throughout the day. The CBOE Volatility Index (VIX) was as low as 22.50 and as high as 50, so that kind of explains how volatile the session was.

[hana-code-insert name=’adsense-article’ /]Not too long ago we were getting a great deal of stocks with strong fundamentals that were appearing on my bearish scan simply because they were overbought.

Last night we had 104 bullish signals and only one bearish signal and there were numerous stocks and ETFs to choose from for today’s option trade idea, but it came down to a stock with great fundamentals and appeared to find support.

Chipmaker Analog Devices (Nasdaq: ADI) is today’s stock pick.

The company has seen tremendous earnings growth and ranks in the top five percentile in that category. The company boasts a profit margin of 35.7% and a return on equity of 21.6%. Sales grew by 54% last quarter and the company will report earnings again on February 28.

The chart above was in my archived charts and I didn’t add anything to it. I have been watching this trend channel for quite some time now and find it encouraging that the stock dipped below the lower rail, found support at its 52-week moving average, and bounced back up in to the channel. It also helps that the sentiment toward ADI recently reached its most bearish level since January ’16.

Buy to open the March18 85 strike calls on ADI at $6.00 or better. These options expire on March 16. The market looks as though it is going to remain volatile for the foreseeable future, so you might want to ratchet down expectations and don’t be afraid to take gains off the table at 60-70% rather than targeting 100% like I usually do on my option trades. In the case of this option, of ADI returns to its recent high, this option would be worth over $13 and would have a gain of over 100%, but if it gets to 70% before the earnings report, I would lock in gains on the first half of the trade and then see how it does from there.

— 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,

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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.