Call on This Low-Cost Retail Stock

by John Kmiecik | May 6, 2013 8:34 am

When a stock’s price has gained in value is there still room for it to move higher still? Of course the answer is yes but there are signs that might just better the odds of the stock continuing to rise. Here is a trade idea on a company whose stock looks like it may continue to head higher.

TJX Cos. (NYSE:TJX — $49.55): Long Calls

The trade: Buy the June 50 calls for 1.15 or less.

The strategy: The long call is probably the most basic strategy in options and is used for a bullish outlook on the underlying. In this instance, 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 TJX can continue to rise, and the maximum loss is $1.15 or whatever was paid for the option if TJX finishes below $50 at June expiration. Breakeven is $51.15 at expiration based on a cost of $1.15.

The rationale: TJX operates discount and off-price apparel and home goods retail stores globally. The company is generally well-regarded by many analysts, and it has improved its earnings during the past couple of years. Yes, the economy might be improving slightly, but no matter what, shoppers will always be looking for a bargain.

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However, the real reason for this trade idea is what happened on TJX’s chart.

On Friday, the stock gapped above a previous resistance area (prior highs) — a bullish sign — and finished the day just off its high. A break of a resistance area after basing at that level for a few sessions could lead to a continued move higher. A retest back to prior resistance, which is now support, before moving higher cannot be ruled out either.

TJX is scheduled to report earnings on May 21. Considering that such an announcement could cause some volatility in the stock, it might be prudent to exit the position before the report.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

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