Traders turned their backs on tech stock Rambus (NASDAQ:RMBS) after it reported earnings last Friday. The small-cap stock took a 12% hit…and I don’t see it going much lower than that.
Based on past price movement, my Power Options scanner has identified Rambus as a powerhouse stock with the potential to outpace its peers QLogic (NASDAQ:QLGC), Xilinx, Inc. (NASDAQ:XLNX) and Avnet (NYSE:AVT). It’s liquid and volatile, making it a perfect choice for options trading.
However, I chose an inexpensive out-of-the-money option several months out to give enough time for my stock scanner to prove itself right. These kinds of options are often ignored, but wrongly so–they can often offer the best intrinsic value, making it much easier to generate double- or even triple-digit profits. And there’s no need to hold the option to maturity once it hits the price target.
Recommendation: Buy RMBS Aug 7 call options at 69 cents or lower. After entry, take profits if the stock price hits $7.60 or the option price reaches $1.20. Exit if the stock price closes below $6.40, or the option price falls to 50 cents.
Remember, if a profit target is hit intra-day, exit and take profits immediately. If the position closes at or below the stock-based or options-based stop loss, exit the trade the next morning at the open.
Additionally, if an option has neither hit the stop-loss nor the target within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.
If you’d like to learn more about finding undervalued options trades like this one, join me this afternoon for a free presentation I’m giving on that very topic: Use Underpriced Options to Supercharge Your Profits. The event will start at 4:30 ET. Register for free now!
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