The autumn correction appears to be over, and stocks are oh-so-close to a new all-time high. Indeed, by the time you read this, the S&P 500 may well be in record territory. So to celebrate the bulls’ return, we’re cooking up three smart options trades.
Previous to the recent trend reversal, it was tricky to find quality bullish patterns. Solid setups became scarce with the S&P 500 stuck below the 50-day moving average and many sectors like healthcare, consumer staples, and industrials falling into downtrends. In that environment, intelligent traders adopt a “less is more” approach. Priorities shift from maximizing gains to minimizing losses.
But, as I said, the flip has switched. With the S&P 500’s trend now pointing in the right direction, it’s time to dial up exposure. Here are three stocks that offer good opportunities right now.
As always, we’ll do a quick rundown of each chart, followed by an options trade.
Smart Options Trades: Berkshire Hathaway (BRK.B)
Financials have been riding the twin tailwinds of an economic recovery and rising long-term interest rates. The former leads to more borrowing and business for banks. The latter expands profit margins by increasing how much they can charge on loans. It also boosts the yield banks receive on deposits invested in Treasurys and other low-risk debt instruments.
Whether or not you understand precisely why financials are enjoying the current economic climate matters less than your ability to read a chart. The Financial Sector ETF (NYSEARCA:XLF) has been a monster bull run and exhibited relative strength during the recent market correction. The largest holding in the fund is Berkshire Hathaway, and after this week’s breakout, I think it has room to run.
To capitalize, consider entering a bull call diagonal spread.
Options Trades: Buy the December $280 call while selling the November $290 call for a net debit of $8.40.
Alcoa (AA)
Inflation pressures have been heating up. Crude oil gets the lion’s share of the attention, but industrial commodities across the board have been climbing. While some traders try to exploit the raging bull run by buying commodities directly, others use metal-based companies like Alcoa that benefit from the price ramp.
Last week’s earnings report delivered smashing profits. The Street cheered by jamming AA stock to a fresh 52-week high on heavy volume.
We now find ourselves in a four-bar pullback that has returned prices to pre-earnings levels and potential support. As long as we form a higher pivot low above the rising 50-day moving average ($47.25), I like buying this dip.
Options Trades: Sell the November $44/$39 bull put spread for 64 cents.
Consider this a bet that AA stock will stay above $44 for the next month.
Smart Options Trades: EOG Resources (EOG)
Energy stocks have been red hot of late, bringing no shortage of opportunity to investors looking to cash in on oil’s ascent. While many stocks in the space are overbought, some have paused to build compelling breakout setups.
EOG Resources is one of them. Its price is basing nicely above a rising 20-day moving average. What’s more, $100 looms large overhead as a psychologically powerful magnet beckoning to prices. If you think the trend continues, there’s about $8 of upside from here.
No need to get overly fancy in the trade structure here. I think a simple bull call spread will suffice. We’ll go to December to provide some time for the stock to make its move.
Options Trades: Buy the December $95/$100 bull call spread for $1.60.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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