In a comeback for the ages, stocks surged into the weekend. Call it an oversold bounce. Call it a relief rally. Blame it on shorts covering or bottom fishers finally casting a line. Whatever you name it, and whoever you blame it on, here’s the reality. The pendulum of pessimism had swung too far, and the market gods demanded a reset. If nothing else, it makes for an exciting backdrop for this week’s top stock trades.
Because of the heightened uncertainty and persistent overnight gaps, I’m inclined to offer something for both bulls and bears. It increases the odds that at least one of today’s offerings pays out.
I went with three different themes.
First, I found a beaten-down growth stock that offers a low-risk entry point. Second, I found an energy stock riding high on the oil gush. Third, I found a momentum stock that blasted shorts with better-than-expected earnings and is now clawing out of the grave.
That said, here are this week’s top stock trades:
Let’s look at each chart and build an options strategy to profit.
Top Stock Trades: Roku (ROKU)
Roku shares were down 71% ahead of this month’s earnings release. After such a vicious beatdown, you would think that all the bad news would be priced in. But you would be wrong. After revealing underwhelming numbers for the past quarter, bears attacked, sending ROKU stock down another 29%.
Volume exploded, and mercifully, there wasn’t any further follow-through. Since then, the stock has cobbled together a five-day bounce to fill the gap. But now, we have multiple resistance levels overhead that could hinder the recovery attempt. If ROKU turns lower, this is a perfect entry for new bear trades.
The Trade: Buy the April $120/$100 put spread for $4.10.
You’re risking $4.10 to make $15.90 if prices sink back below $100. Of course, the odds of such a significant decline are slim, but even if the stock drops to $118, you should be able to double your money.
Devon Energy (DVN)
The energy sector has been one of the few safe places to hide during this year’s market mayhem. Booming oil prices have kept the balance sheet of energy companies healthy and the profits flowing. Devon Energy boasts one of the best uptrends in the space and has held up exceptionally well during the past two weeks of volatility.
Its price didn’t even close below the 20-day moving average throughout the drama. DVN stock was jumping 5% on Monday and remains a favorite among traders. If you think the gains will keep coming, then now is as good a time as any to deploy new trades. Let’s use call spreads to have the potential at a significant profit.
The Trade: Buy the April $60/$65 bull call for $1.45.
You’re risking $1.45 to make $3.55 if DVN gets above $65 by expiration.
Top Stock Trades: Block (SQ)
Nearly every growth stock got torched on earnings this season. Every day there were one or two blow-ups in my watchlist. The torturous trend made the occasional earnings winner all the more interesting. Last week, two growth companies bucked the trend and soared on their numbers. The first was Etsy (NASDAQ:ETSY), the second was Block.
If you feel like bottom fishing beaten-down growth stocks, then picking one that just defied the odds with positive earnings is an intelligent way to go. And, as if Friday’s monster 20% gain weren’t enough evidence. SQ stock was up another 8% in early-morning trading on Monday. We’re testing the declining 50-day moving average, so some selling pressure could enter the equation, but any weakness at this point will likely be a buying opportunity.
For a higher probability of profit, consider selling put spreads.
The Trade: Sell the April $100/$95 bull put spread for 75 cents.
If SQ stays above $100, you’ll pocket the 75 cent credit.
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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