Its official, President Trump is now in office. So, what’s this mean for investors holding blue-chip stocks? My thoughts are quite simply the stock market is going to do what it’s going to do.
Not to be unconcerned about the new administration’s agenda, but politics aside, some blue chips will falter and others will invariably rally. And more often than not, it won’t be due to some monumental shift in public policy or some off-the-cuff tweet that investors are reacting too.
On that note, and irrespective of what goes on during the first 100 days, three blue-chip stocks in today’s market that look poised for upside are Costco Wholesale Corporation (NASDAQ:COST), International Business Machines Corp. (NYSE:IBM) and Illumina, Inc. (NASDAQ:ILMN).
So let’s take a look at COST, IBM and ILMN, both on and off the price chart, and offer up some options-based strategies to better serve and protect those blue-chip stocks.
Blue-Chip Stocks to Buy: Costco (COST)
Click to Enlarge
The company reported earnings early last month which saw profits and sales come in shy of Street forecasts. For their part, investors shook off the headline numbers and bid shares higher with COST finishing up nearly 2.5% to hit a three month high.
Bullish attention may have been focused on other promising metrics from this blue chip, such as year-over-year improvements in Costco’s top and bottom lines and membership fee increases.
Regarding the pay-to-shop business model, with the new administration’s protectionist trade agenda hurting many retail names, this blue-chip stock may have a leg up on the competition. Bottom line, the membership program is an important piece of COST’s success and appears to be getting stronger. This blue-chip stock also looks very attractive on the price chart and poised for a classic breakout. The weekly view of COST shows a fairly durable base-on-base pattern that’s putting the finishing touches on a handle within a cup-shaped formation.
There’s no guarantees a buy triggered through last month’s high of $164.95 will result in a successful breakout. Nonetheless, the pattern looks promising for continued upside in COST and perhaps the start of a cycle of relative strength following a comparatively weak 2016.
Reviewing this blue-chip’s options board, the Feb $165/$170/$175 long call butterfly is attractive. Priced for $1.20 and less than 1% of the risk associated with owning COST shares outright, the trader’s max reward of $3.80 is achieved if the blue chip can rally 3.5% into February’s expiration. The profit range extends from $166.20 to $173.80.
A breakout in Costco could add a couple to few percent of upside without too much effort. That’s nice of course. Further, with earnings in March, the upside during the life of this February strategy is also likely limited — and another reason to like the profit profile offered from a long butterfly in this blue-chip stock.
Blue-Chip Stocks to Buy: IBM (IBM)
Click to Enlarge
Shares of IBM shot up 2.24% during Friday’s session following the company’s top- and bottom-line beat and after shaking itself of pesky wrong-footed traders in the after-hour’s session.
Highlights behind the blue chip’s solid beat include growth in strategic initiatives such as the cloud, analytics, mobility and security markets. What’s up next for Big Blue? In our estimation, and as the weekly chart reflects, a recent breakout of IBM’s long-standing downtrend line and Friday’s slight push above a tight, lateral base consolidation should conspire to send shares higher in the coming weeks and months.
Checking the options board and IBM at $170.55, a March $170/$175 bull call spread for $2.15 is priced nicely for positioning on this blue-chip stock.
With a holding period of just under two months, this strategist can achieve a max return of $2.85, or 133%, if IBM is able to follow-through on Friday’s breakout and tack on a fairly benign 2.6% into March expiration.
Blue-Chip Stocks to Buy: Illumina (ILMN)
Click to Enlarge
Following a 50% corrective move over the past two years, ILMN stock looks ready to breakout from a newly formed handle pattern within a corrective cup-shaped base.
Shares of the blue-chip recently surged higher on a bullish price gap of more than 15% back on January 10. Triggering the reaction by investors, as well as initiating ILMN’s handle pattern on the price chart, the company announced NovaSeq, a new gene-sequencing product and issued an above-views sales forecast.
Reviewing ILMN’s options and aware an earning’s catalyst on Jan. 31 could be its own kind of chart disruptor, for better or worse, I like the March $165/$170 bull call spread. Priced for $2 or better this spread begins to breakeven at $167 and just pennies below the high of the handle established on Jan. 10. A move of just 6.4% and above $170 at expiration will generate a profit of $3, or a 150% return.
Granted some of the earnings reaction may already be backed into ILMN’s share price. It’s for that very reason this vertical is attractive as risk is both defined, reduced and positioned with sufficient time and price level to see the maximum profit capture as reasonable.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
