CVS Hasn’t Been This Low Since 2013, and it Could Head Higher

Its earnings in February sent it to a new 52-week low

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This morning I am recommending a bullish trade on CVS Health Corporation (NYSE:CVS).

After a weak earnings report in February, CVS has lost more than 15% of its value. But I think the move to the downside is overdone, and if we sell puts with a strike price near CVS’s new low, we could walk away with full profits when the options expire.

Still Paying a Dividend

CVS missed its earnings per share (EPS) estimates, losing $0.37 per share, when it was expected to report a positive EPS of $1.81. That huge miss sent the stock down by more than 8% in one day in February, and CVS continued lower after that.

But CVS is still paying a $0.50 dividend, and at its new, lower price, that makes the stock even more attractive. People could start buying CVS because it is a bargain.

A Slight Recovery

Since missing earnings, CVS found a new 52-week low at $51.93, a level it hasn’t seen since early 2013. I mentioned in recent trades on Goodyear Tire & Rubber Company (NASDAQ:GT) and TJX Companies, Inc. (NYSE:TJX) that I am feeling cautious in the current market environment, but CVS moved too far down too fast.

Daily Chart of CVS Health Corporation (CVS) — Chart Source: TradingView

 

On the daily chart we see CVS has recovered slightly from its 52-week low, but it is seeing some resistance at just under the $58 level. Despite that resistance, CVS hasn’t dropped back down to retest its recent lows. Instead, it has stayed just above $55.

It is too early to declare $55 a new support level, but it is a good sign that CVS is moving sideways right now. Selling puts is a good way to collect income while we wait for the stock to recover. I think the stock will stay well above its 52-week low, but if it does move below that level, I’d recommend exiting this trade.

Sell to open the CVS April 18th $52.50 put at about $0.30.

Note: There are several April expirations available for CVS options. Be sure you are opening the monthly options that expire on Thursday, April 18, 2019.

The Good Friday holiday falls on April 19th, 2019. Because U.S. markets will be closed that day, April monthly options will expire the day before, on April 18th, 2019.

About Naked Put Writes

A naked put write is a bullish position in which you expect the price of the underlying stock to increase.

If you are holding the option at expiration and the stock is trading below the $52.50 strike price, you will be put the shares.

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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.


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