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Trade of the Day: Smart Balance (SMBL)

Not every strong trend makes for a strong options trade.


My Power Options system identifies the best candidates for option trading or short-term stock trading, and in the spirit of getting together with family and friends to celebrate winter holidays, I’m taking a look at food and beverage stocks.

Chiquita Brands International (NYSE:CQB) is the powerhouse in this space, showing strong relative strength over the past six weeks. Coca Cola (NYSE:KO), on the other hand, has broken down from an attempt to rally up. This is one of the most reliable signals on which to take action with a bearish trade.

But not every strong  trend makes for a strong options trade. In addition to having an underlying stock that’s poised to jump way up, a good option must be low-priced (which reduces your risk), and have a good probability of profit.

So based on stock price movement and theoretical option values, my preferred food stock options play is in Smart Balance (NASDAQ:SMBL).

Recommendation: Buy SMBL Mar. $15 call options at 80 cents or lower, when the stock price is around $13.60. After entry, take profits if the stock price hits $15.20 or the option price reaches $1.60. Exit if the stock price closes below $12.80 or the option price falls to 50 cents.

This trade has a 26% probability of reaching the $1.60 profit goal. That may seem low, but 20% is about average for low-cost options. Plus, we calculate the probability that the option will hit its target price; the probability of returning a smaller profit is higher.

Also, our computers calculate probabilities assuming a random market. So a call option with a 20% probability really has a 40% probability in a bull market, and a zero percent chance in a bear market. The opposite is true for a put option. It has twice the probability of reaching its target price in a bear market, and a zero percent chance in a bull market.

InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.  Try Maximum Options today for 2 months for only $99

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