This Trade Targets a 150%-Plus Return by June

Option Trade of the Day: Allison Transmission Holdings (ALSN)

The indices screamed higher again yesterday and when you combine the gains with Friday’s gains, the three main indices have all gained 2.8% or more in the last two days.

All ten of the main sectors have gained ground over the last two trading days, but tech, telecom and financials have led the way as the only three sectors to gain more than three percent.

[hana-code-insert name=’adsense-article’ /]The second straight big day of gains created another day where the bullish signals were much greater than the bearish signals with 40 and four.

This caused my market barometer to move back in to positive territory.

As a result I have another bullish trade idea for you again today and the company is Allison Transmission Holdings (NYSE: ALSN).

I have been tracking ALSN for quite a while due to its strong fundamentals and have been waiting for a signal from the chart. I think we have it now.

You can see that the stock has been moving higher for the past two years and has formed a trend channel in the process. The lows that have created the lower rail came when the RSI and stochastic readings were at least below the 50 level and then reversed. When they did reverse, the stock rallied by over 30% each time (1/16, 10/16, 8/17) and these rallies took less than three months.

Buy to open the May18 35 strike calls on ALSN at $5.50 or better. These options expire on May 18. If we get a 30% rally in the stock again this time, that would put the stock up above the $50 level and would make these options worth at least $15. That would be worth a gain of approximately 175%. I would suggest closing half of the position at the 100% level and then take a wait-and-see approach after that. I would use the $38 level as a stop-loss point.

— 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.