This Trade Targets a 50% Return in Four Months

Option Trade of the Day: Digital Realty Trust (DLR)

The market started off with losses yesterday and the selling accelerated through the morning and in to the first part of the afternoon. There was some buying that came in to play in the last hour and a half that moved the indices off their lows.

One thing I took note of about yesterday was that the Dow and S&P are both below their 50-day moving averages at this point while the Nasdaq and Russell 2000 are both still above the trendline.

[hana-code-insert name=’adsense-article’ /]Traders will be focused on the Fed meeting for the next couple of days with an expected rate hike coming on Wednesday.

That may have set the bearish tone for Monday.

With the market getting hit pretty hard yesterday, I was surprised to see my scans produce a relatively balanced list of bullish and bearish signals.

There were 18 on the bearish list and 17 on the bullish side.

Even with the balanced numbers, the barometer continued to inch back to toward the zero level from the deep negative readings we had last week.

After looking at all of the opportunities, today’s trade idea is a bearish one on Digital Realty Trust (NYSE: DLR). The REIT ranks in the bottom 20% in EPS growth and the overall REIT industry has been weak lately in terms of the price performance.

The chart for DLR shows a downward sloped trend channel that has dictated trading over the past four and half months and the stock is currently banging up against the upper rail. We also see that the stochastics performed a bearish crossover last night and those have been pretty reliable signals over the past six months. It is also worth mentioning that the sentiment toward DLR has been skewed to the optimistic side in the past few weeks.

Buy to open the July18 110 strike puts on DLR at $9.40 or better. These options expire on July 20. I expect the stock to drop approximately 10% in the next month or so. I would prefer the May options to the July options, but there wasn’t any open interest in the May options yet. If the stock drops down to $96, these options would be worth at least $14 in intrinsic value. We would be looking at a gain of approximately 50% if that is the case. Hopefully there will still be some time premium in the options at that time.

— 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.