Safety plays are making a comeback amid surging volatility and falling tech stocks. But this isn’t a new phenomenon; In fact, it’s as old as the hills. When corrections strike and leaders finally succumb to gravity, money inevitably flows to defensive names. With that in mind, this gallery provides three top stock trades to buy for those seeking safety.
Collectively, they all belong to the consumer staples sector, and have a history of exhibiting relative strength during market downturns.
What we’ve witnessed over the past two weeks is a shift in investor preferences. For months, traders have sought to maximize their return on capital. And with the Nasdaq Composite notching new record highs seemingly every day, who can blame them? Momentum stocks were en vogue and out-sized gains rewarded risk-takers everywhere. However, September ushered in a change in tone.
Suddenly, investors are emphasizing a return of capital. Safety, in other words, is being viewed as superior to maximizing gains. As long as the new trend holds, these picks should be in demand. I’ve scoured the staples sector, and these three stocks have the most compelling setups for next week. They are:
After a brief look at their charts, I’ll share my favorite options strategies to capitalize on these top stock trades. So, let’s dive in!
Top Stock Trades to Buy for Safety: Verizon (VZ)
The past week of selling has been a welcome development for Verizon. If for no other reason than it returned its share price to an old breakout level. Those who missed the initial burst through $59.50 now have a second chance. Now that we’re testing old resistance from the top side, there’s a strong possibility it becomes new support.
The so-called principle of polarity creates all sorts of trading opportunities, and this is one of them. The recent pivot high of $61.50 signaled a continuation in VZ stock’s uptrend by notching a new high watermark for 2020. With the rising 20-day moving average providing support beneath, this is as good an entry as any.
Overall, while you could always buy shares of stock, options provide a compelling way to juice your returns. Implied volatility is low, making diagonal call spreads a great way to go.
The Trade: Buy the Jan. $55 call while selling the Oct. $61 call for a net debit around $4.85.
Use $50 to $100 as your profit target.
Coca-Cola has been moving in lock-step with Verizon recently. It blasted through the 200-day moving average in early-September, then formed a classic bull pennant formation. Friday’s high-volume rally officially completed the pattern and signaled the beginning of another advance.
Now, a run to $55 seems likely.
At the 17th percentile, KO stock options are also cheap enough to make call spreads compelling. Once again, I like the bull call diagonal. Think of it as a cheaper alternative to a covered call. Essentially, we’re buying a long-term call to serve as a proxy or substitute for long stock. Then, we’re selling a short-term out-of-the-money call option against it.
The position profits from a mildly bullish move in the stock and time decay.
The Trade: Buy the Nov. $47.50 call while selling the Oct. $52.50 call for a net debit around $3.55.
Use $100 per spread as your profit target. It translates into a tasty 28% return on investment.
Top Stock Trades to Buy for Safety: Walmart (WMT)
Walmart rounds out today’s trio of top stock trades with a compelling bull retracement setup. It has been more volatile lately due to the drama surrounding its now failed deal with Microsoft (NASDAQ:MSFT) to buy TikTok. Regardless of how it all shakes out, WMT stock boasts a tempting buy the dip setup heading into the new week.
It’s down seven straight days and ended with a doji reversal candle at its rising 20-day moving average. On top of that, a resistance zone looms close at $134 and is likely to provide support if the 20-day fails. I could also add the 50-day moving average coming up fast, but you get the point. There’s a cluster of potential floors here.
I would wait for WMT stock to break above a previous day’s high to signal the pullback has terminated. When that happens, I like selling put spreads. The implied volatility is still high enough to make these attractive.
The Trade: Sell the Oct. $125/$120 bull put spread for around 55 cents.
On the date of publication, Tyler Craig held LONG positions in KO, VZ, and WMT.
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