Five Below (Five) Recovers in August and Offers a Buy Signal

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Five Below (Five) Recovers in August and Offers a Buy Signal

Five Below reported earnings in the past week which led to an upside break. Take a look at the following article for more details – What Five Below Wants Investors to Know. Also check out this article which discusses a recent price target upgrade from the Royal Bank of Canada – Five Below (NASDAQ:FIVE) Shares Gap Up Following Analyst Upgrade.

There have been quite a few technical developments in FIVE over the last few weeks. To start, the stock was correcting lower from a high in late April and this decline was contained within a descending trend channel. There was an upside break of this channel after the earnings report in the past week which offers a bullish signal. The stock has regained its 50 and 200-day moving averages which is also very positive. On a monthly chart, FIVE has posted a reversal candlestick pattern as it closed in the green in August to snap a prior three consecutive month decline.

FIVE Chart September 2019

If you agree there’s further upside ahead for FIVE, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.

Buy To Open FIVE 04OCT19 117 Puts (FIVE191004P117)
Sell To Open FIVE 04OCT19 122 Puts (FIVE191004P122) for a credit of $1.85 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when FIVE was trading near $123.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $182.50 and your broker would charge a $500 maintenance fee, making your investment $317.50 ($500 – $182.50).  If FIVE closes at any price above $122 on October 4, both options would expire worthless, and your return on the spread would be 57% (650% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates August 29, 2019

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry