In this economy, it seems like many people are scaling back their purchases, especially on the non-essentials. But who doesn’t want to look good or be proud of where they live? You still can look and feel good, but you might have to forget about paying full price like some retailers charge. Here is a trade idea that makes sense personally and for your portfolio.
Ross Stores (ROST — 66.48): Long Calls
The trade: Buy the August 67.5 calls on Ross Stores (NASDAQ:ROST) for $2.30 or less.
The strategy: The long call is one of the most 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 ROST can continue to rise, and the maximum loss is $2.30 or whatever was paid if ROST finishes below $67.50 at August expiration. Breakeven is $69.80 at expiration based on a $2.30 purchase.
The rationale: Ross Stores, together with its subsidiaries, operates off-price retail apparel and home fashion stores. It’s no surprise that these stores have been doing relatively well considering the economy. ROST has many analysts rating it a buy because of its solid fundamentals, which include nice revenue growth and a good record of earnings-per-share growth.
Even though the fundamentals are impressive, this trade idea really is about the technicals. Just this past week, ROST set its all-time high, and for almost a year the stock has been climbing higher in a beautiful uptrend. The stock has pulled back now, and on Friday formed a little hammer candle (small body candlestick with a wick below it), which can sometimes trigger a reversal.
A bullish sign would be if ROST can trade above Friday’s high, which was $66.69. The first sign of resistance would be around $69.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.