Support and resistance are probably two of the more popular topics when it comes to technical analysis.
There are some traders who have a theory that it really isn’t important — that a stock is going to do what it wants to do. Then there are other traders who can’t even fathom putting on a trade without using them.
This trade idea is for the latter of the two and will test that theory.
SanDisk Corp. (NASDAQ:SNDK) released its Q4 earnings a couple of weeks ago, and the numbers did not impress investors. Shares promptly gapped down and have traded around the $46 area for a week or so.
Technically, the stock has support right around the $46 area, which could be the reason it did not head lower. On Friday, SNDK was able to gap just above the previous week’s highs, retested the highs and moved even higher on the day.
Can this be a bullish sign? It could be if the stock can trade over Friday’s high, which was $47.60. A target of $52 (resistance) is not out of the question and a break below $46 would put the bulls to rest.
The trade: With SNDK trading here at $47.55, you can buy the SNDK March 48 Calls for $1.80 or less.
The strategy: The long call is one of the basic strategies in options trading. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because SNDK can continue to rise and the maximum loss is $1.80 if SNDK finishes below $48 at March expiration. Breakeven is $49.80 at expiration.