This Trade Targets a 50% Return in 6 Weeks

Option Trade of the Day: Andeavor (ANDV)

We saw another big selloff on Friday and the selling accelerated as the day went on. The indices closed near their lows of the day. The sharp selling from the last two sessions has put the S&P and Dow within a few points of their 200-day moving averages.

[hana-code-insert name=’adsense-article’ /]These two indices haven’t closed below that trendline since June 27, 2016.

Many traders watch the 200-day moving average as a longer term support level, so a close below it could be a bearish signal to those traders.

My scans didn’t produce many signals on either side Friday night.

There were only five bullish signals and 10 bearish signals.

The barometer did shift from a small positive number (1.5) to a small negative reading (-2).

Given the increase in volatility and the potential for big shifts, I am suggesting a straddle on Andeavor (NYSE: ANDV) as today’s trade idea. The oil refiner has an EPS rating of 60 and gets a “C” on IBD’s SMR rating system.

The $102.50 area has been a point of both support and resistance in the past six months. It was support on several occasions in October and November and it acted as resistance earlier this month. I look for the stock to either break down sharply or break out. The overall market is approaching oversold levels and we could see a bounce like we saw in early February. If that happens, I can see ANDV bouncing back up to $115 level rather easily. I also see the possibility that the 50-day moving average acts as a second layer of resistance and drives the stock back down below the $90 level.

The idea of a straddle is that the stock is going to make a big move in one direction or the other. You buy both a put and a call at the same strike price and look for a more modest gain than you would on a straight put or call purchase. In this case the stock is just below the $101 level and that is the strike we will work with in today’s trade idea.

Buy to open the May Week One 101 strike straddle on ANDV at $8.20 or better. These options expire on May 4. The calls are $4.15 on the asking price and the puts are at $4.05 on the asking price. Given the target price of the straddle, I would set a gain of 50% on this trade. This means the stock will need to move up to $113.30 or down to $88.70 to hit our target gain.

— 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.