[Options] Delivering Gains
JC has a research piece out today about looking for relative outperformers in the Travel, Leisure, and Entertainments spaces. Signs are pointing to some resurgence here and the past leaders are likely the ones to continue leading the way.
And one of those names, of course, is Domino's Pizza $DPZ.
Here's JC:
$DPZ currently offers up a favorable risk vs reward opportunity to participate. If $DPZ is above 370, we want to be long with a target up near 600. If we’re below 370, then the stock is a no touch
And here's the zoomed in chart showing the opportunity more clearly:
Well, this idea sure made me hungry. And I like the clearly defined risk level.
While volatility priced into $DPZ options is pretty tame, it's still a high-priced stock. So in order to limit my dollar risk in a bullish trade, I'm going to utilize a bull call spread.
While JC has a price target of 600, a bull call spread will limit my potential upside. But that's ok, I'm not gluttonous (trying to eat less carbs), I'm just looking to snatch a couple of hot slices from that move.
Here's the Play:
A March 400/450 Bull call spread for a $16.00 debit looks pretty tasty here. This means I'd be long the 400 calls and short an equal amount of 450 calls. And the debit I pay is the most I can lose in a worst case scenario.
As JC mentioned, if $DPZ is below $370 per share, we no longer want to be in this trade. So if we see a close below $370, that'll be our signal to close up shop and limit our losses.
If the move we're looking for materializes, I'll be looking to close this spread for a profit at approximately $33.00 for the entire spread. This would represent a little more than doubling of our money and we would have captured at least 50% of the total possible profit if this spread were held all the way to March expiration and DPZ closed above our short strike ($450). I have no interest in holding this spread that long, if I can help it.
However, if we still find ourselves holding this position on March 1st (because neither our stop loss level or profit target levels have been met), then it'll be decision time: If DPZ is above $400 on March 1st, then we'll continue holding the spread to our profit target, with a tight trailing stop loss behind it. If we're below $400, then we'll just close the spread down for whatever we can salvage.
If you have any questions on this trade, please send them here.
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