Many stocks are sinking this week, particularly those lying at the intersection of growth and technology. In early-morning trading Thursday, the Nasdaq was attempting to hold support and stave off a more significant breakdown. But while the tech sector has been struggling, consumer staples have been soaring. At least, as much as a defensive, low-beta sector like staples can soar. Today, I’ll spotlight three breakout stocks that are offering refuge from the storm.
Sort the market sectors by percentage change, and do you know what you’ll find? The Consumer Staples ETF (NYSEARCA:XLP) is outpacing every other sector on Thursday. At the time of this writing, XLP is up 1.18%, while the S&P 500 is unchanged.
The relative strength provides all the reasons needed to shop for compelling patterns to trade in defensive names. I scanned the entire space and telecom stocks to see who was offering the best setups. These were my three favorites.
After a closer inspection of each chart, I’ll share how to use leverage in the options market to juice your returns.
Breakout Stocks Playing Defense: Coca-Cola (KO)
Coca-Cola has been quietly climbing over the past three months. Now it’s testing key overhead resistance at $55 and is itching for a breakout. I’ve included the weekly chart because it provides a clearer view of the bigger picture. What’s particularly enticing is the lack of overhead supply once we break above $55. The next ceiling doesn’t come into play until $60, offering plenty of room for upside follow-through.
The low implied volatility rank of 11% suggests long premium plays are the way to go. Because KO stock is a more gradual-moving stock, let’s build a call diagonal spread that doesn’t require that large of a move before generating a good return.
The Trade: Buy the July $52.50 call while selling the 4 Jun $56 call for a net debit of around $2.24.
If KO rises toward $56 and beyond over the next month, then you could potentially pocket between 60 cents and $1.30 per spread.
AT&T has struggled ever since last March’s beatdown. While the rest of the market surged higher on stimulus-fueled rockets, T stock has been carving out a year-long basing pattern. Investors weren’t as convinced that AT&T’s earnings would recover with the same vigor as that seen elsewhere. Fortunately, some of those fears were laid to rest with last month’s better-than-expected quarterly report.
Since then, bulls have dominated the price action. And, with Thursday’s jump above $32, T stock is now pushing outside of its trading range. The weekly chart shows the promise of this week’s breakout bid. The next stop is the 200-day moving average. Beyond that and there’s not much to stand in the stock’s way until the high $30s.
And did I mention AT&T pays a 6.4% dividend?
The Trade: Buy the July $31 call and sell the 11 Jun $33.50 call for a net debit of $1.50.
If T stock climbs to $33.50 and beyond over the next month, then the spread could deliver a gain of 50 cents to 95 cents per spread.
Breakout Stocks Playing Defense: Verizon (VZ)
AT&T isn’t the only telecom that’s been turning heads. Verizon is working on its seventh straight up day in a row and is now on the brink of pushing through key resistance. That makes it the third and final of our breakout stocks to play. The $59 area has rebuffed multiple rally attempts this year. If the current bid can finally breach it, I think VZ stock can ramp back to its 52-week high, near $62.
To capitalize on the ascent and the low level of implied volatility, I suggest once again using diagonal spreads.
The Trade: Buy the July $55 call while selling the June $60 call for approximately $3.75.
If Verizon sits at or above $60 at expiration, you will capture a gain of around $1.00 per spread.
On the date of publication, Tyler Craig held a LONG position in T, KO, and VZ.
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