It’s ugly out there. The CBOE Volatility Index (CBOEINDEX:VIX) shot to almost 40 on Monday, marking panic levels not seen since October 2020. And then, as is often the case in times of extreme fear, we found a bottom. The S&P 500 came back from a nearly 4% intraday loss to close green on the day. It’s a feat the index has only ever accomplished two other times in history. This is the volatile backdrop we must wrestle with for this week’s top stock trades.
In scanning for ideas, two potential themes emerged.
First, we can favor relative strength by buying dips of strong uptrends that remain intact after the recent turmoil. This includes leading areas like energy and consumer staples. Second, we can go dumpster diving and bottom fish some of the growth names that showed capitulation yesterday.
The former approach offers less risk but likely less reward. The latter holds more upside but comes with greater risk — growth stocks are broken and battered.
Rather than go all-in on one theme, I’m offering a bit of each with the following three ideas:
Let’s take a closer look at each.
Top Stock Trades for the Week: EOG Resources (EOG)
Crude oil remains virtually untouched and sits a stone’s throw from its 52-week high. The resilience is impressive given the plunge in nearly every other asset, and it makes shopping the pullback in energy stocks an obvious choice here. There are many worthy candidates, but the cleanliness of EOG stock’s chart demanded a mention.
The location of buyers’ return on Monday couldn’t have been more perfect. EOG returned to its rising 20-day moving average and old resistance near $96. It was as logical a place as any for support to form, and by the end of the day, we developed an impressive reversal candle. Because stocks are sinking again premarket, I suggest using a break above Monday’s high as a trigger for today’s trade idea.
The Trade: Buy the March $105/$110 bull call spread for around $2.
You’re risking $2 to make $3 if EOG rises beyond $110 by expiration.
Procter & Gamble (PG)
Consumer staples are made for times like these. When equities elsewhere are losing their minds and volatility is in orbit, investors flock to the safety and lower beta of companies like Procter and Gamble.
Sure, the stock slipped on Monday, but it rallied back and closed oh-so-close to a new high. That leaves its long-term uptrend and short-term consolidation pattern intact and tempting for new trades.
Over the past month, we’ve seen a sideways base form with clear resistance at $165. Last week’s earnings report brought prices back to the top end of the range where they still sit. The more we chip away at the ceiling, the weaker it becomes.
If you want to position yourself for the eventual breakout, here’s an intelligent way to do it.
The Trade: Buy the March $165/$170 bull call spread for $1.60
You’re risking $1.60 to make $3.40 if PG climbs above $170.
Top Stock Trades for the Week: Ark Innovation ETF (ARKK)
We conclude this week’s top stock trades on the high risk/high reward end of the spectrum. When it comes to growth stocks, no exchange-traded fund has more effectively captured the imagination of investors than Cathie Wood’s Ark Innovation ETF. It became synonymous with the “growth trade” and is as good a proxy as any for what’s transpired in that area of the market.
Monday’s bullish reversal and volume explosion were mighty impressive. The fund clawed its way back from a steep loss, rising 13% from the lows on its highest volume session in history. Signs like that suggest capitulation and the potential for a rebound. This counter-trend trade certainly qualifies as trying to catch a falling knife. But, we can use options to piece together a high probability play.
Consider this a bet that ARKK stock stays above $60. If you make most of the profit during the next bounce, I’d suggest ringing the register.
The Trade: Sell the February $60/$55 bull put spread for 70 cents.
You’re risking $4.30 to make 70 cents.
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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