Has the Tide Turned for Five Below Inc (FIVE)?

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.

Terry

Has the Tide Turned for Five Below Inc (FIVE)?

Several analysts are looking for more upside in FIVE, here are two of them – Hedge Funds Have Never Been This Bullish On Five Below Inc and I’m Sorry, But the Five Below Stock Selloff Is Overdone.

FIVE fell under a little bit of pressure after reporting earnings in the past week. However, the stock recovered on Friday, resulting in a bullish engulfing candle. This pattern often signals a reversal but what makes it even more significant is that the pattern occurred following a test of important support. Specifically, from the 200-day moving average and the lower bound of a trend channel. A second reversal candlestick is seen on a weekly chart that makes an even strong case that FIVE might turn higher from here.

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 12JUL19 124 Puts (FIVE190712P124)
Sell To Open FIVE 12JUL19 127 Puts (FIVE190712P127) for a credit of $1.33 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when FIVE was trading near $127.50.  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 $130.50 and your broker would charge a $300 maintenance fee, making your investment $169.50 ($300 – $130.50).  If FIVE closes at any price above $127 on July 12, both options would expire worthless, and your return on the spread would be 77% (878% annualized).

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

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