The technology world is filled with alphabet soup nowadays. Whether it’s FANG, FAANG, FAAMG or some other bowl, investors like clumping similar groups of tech stocks, typically for their hot performance. I’ve even got my own — “BITE” — made up of a quartet of stocks that are a bit outside Wall Street’s favorite acronyms.
The past couple of weeks have felt like the sky is falling in tech. The point of view is easy to appreciate if you’re considering the FANG and its constituents Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc (NASDAQ:GOOGL).
Since I last lumped the foursome of FANG together back on July 18, only Facebook is up for the period. If the spawn of FANG — FAANG, which adds Apple Inc. (NASDAQ:AAPL) — is included, it does get a bit better for the group. Nevertheless, the majority of those companies stocks still are lower, and in a couple cases, there’s some serious correction risk.
On the other hand, our BITE stocks — BIDU, ILMN, TSLA and EA — have uniformly gained favor with some significant double-digit gains. That has done wonders for our options strategies, which have collectively hit it out of the ballpark!
We think there’s a rotation in FANG stocks to BITE stocks at the moment. Today, we’ll look at each and offer up a fresh options strategy suited to these winners.
Tech Stocks to “BITE” On: Baidu (BIDU)
The bullish price behavior was the result of a blowout quarter, and in our view, a solid technical platform deserved of the move. Baidu looks to have continued upside for the rest of the year.
Looking at the most recent price action since its triangle pattern breakout, BIDU has consolidated in a constructive manner. With shares still below 2014’s all-time high of $252, but not far removed from it, there’s nothing to suggest the newly confirmed uptrend in Baidu won’t move toward fresh higher ground.
Reviewing the Baidu options board, a long Oct $240/$250 call spread looks attractive. The vertical is priced for an attractive $2.10 with BIDU at $222.50, and has sufficient time to take advantage of pattern follow-through while enjoying the benefits of limited and reduced risk.
Tech Stocks to “BITE” On: Illumina (ILMN)
The world’s largest genomic sequencing outfit recently topped Street bottom and top-line views and raised guidance, helping vault shares roughly 13% higher since I first drew investors’ attention toward the benefits of this stock.
ILMN shares aren’t entirely out of the woods, technically. The post-earnings reaction has resulted in a multiday test of the 62% retracement level for support after marginally clearing the Fibonacci resistance number.
My view is with stochastics curling higher during this consolidation phase, support should hold. I’m optimistic this large cap is setting up for an eventual challenge of its all-time high from two years ago.
The Dec $220/$240 bull call spread looks interesting. With shares at $194.40, the vertical is priced for $3.30. To profit, a rally is obviously needed, but with a few months on the calendar and just more than 1.5% equivalent stock risk, this looks like the best way to earn robust gains while minimizing potential losses.
Tech Stocks to “BITE” On: Tesla (TSLA)
Tesla is up 9% over the period, and price action has been supported by a strong earnings catalyst.
Tesla offered a smaller-than-expected loss, and better-than-forecast sales growth (which more than doubled), in its most recent results. An optimistic Elon Musk also told investors not to sweat the Model 3 deliverables.
Behind the scenes, a decent corrective pullback into support has assisted Tesla in plowing higher. I think TSLA stock might stall for a bit, but the recent uptrend confirmation bodes well for new all-time highs eventually.
A modified bullish fence strategy has once more caught our eye. With shares at $356.65, I suggest selling the Nov $310/$285 put spread and buying the Nov $390/$420 bull call vertical for a debit of $2.40.
If Tesla shares rally, this long delta strategy can begin to see profits accrue immediately. However, to capture any type of payout, TSLA must be trading above $392.40 (and the current all-time high of $386.95) by expiration. Should TSLA really get into gear, a max profit of $27.60 (1,150%!) is possible above $420.
This particular spread combination maintains risk of $27.40 below $285. That amounts to about 8% holding risk. Given TSLA’s volatility, that’s not bad.
Tech Stocks to “BITE” On: Electronic Arts (EA)
Click to Enlarge The last name for investors to consider biting into are shares of Electronic Arts Inc. (NASDAQ:EA). The gaming giant recently reaffirmed the market’s secular growth trend by delivering a solid earnings and sales beat, as well as issuing a new two-year $1.2 billion buyback program.
Stellar and healthy-looking gains of the last couple years have also received additional support. A tight flat base of around 10% was broken to the upside, with EA hitting new all-time-highs in the process.
Currently, EA has pulled back to test the pattern breakout for support. The price action offers a decent spot to enter EA stock with reduced risk.
With Electronic Arts at $115.45, I suggest buying the Sep $115/$120/$125 butterfly for $1.30. It’s not a typical strategy if the trader is extremely bullish. Shorter-term, though, with a profit range from $116.30 to $123.70 and max capture of $3.70 at $120 — near the recently scored all-time-high — this looks like a nice offensive play with an even stronger defensive line.
Investment accounts under Christopher Tyler’s management currently own positions in Baidu stock and its options, but no other securities 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 at @Options_CAT and StockTwits.