If you are a trader, you have probably heard the market adage, “the trend is your friend.” That’s great to know but how can you really capitalize on this wisdom to your advantage? Once a trend is spotted, a trader needs to know how he or she can profit from it. Here is a trade idea using call options that might just give your portfolio some energy!
The Trade Idea – Long Call
Buy the in-the-money Monster Beverage Company (NASDAQ:MNST) May 60 calls for a debit of $4.10 per contract or less (you may have to set a limit order to get in at this price). This long call trade idea can profit if the stock rises and the call premium increases to an amount more than the original premium paid.
Maximum profit is essentially unlimited if the underlying stock continues to rise. The maximum loss is capped at $4.10 if MNST is trading below the $60 level when May options expire. Breakeven is at $64.10 at expiration; if MNST shares are trading above this level when May options expire, this long call will be profitable.
Delta for this call is currently 62, meaning the call will gain 62 cents per contract for every $1 advance in the stock. This also indicates a 62% the position has of being in-the-money by expiration.
Monster Beverage — which was previously known as Hansen Natural — has been on a tear higher. The stock recently hit a new 52-week high, which is not a surprise since the alternative beverage distributer has had nice revenue growth over the past several quarters. The company has a market cap of close to $10 billion and continues to try and improve its products. It recently introduced a new concentrated energy drink.
From a stock chart perspective, MNST has been following a nice trend higher. On Friday, MNST traded down to the bottom of this ascending trendline. This area should now continue act as support and keep the stock from heading lower.
Click to EnlargeIf the stock remains in its current uptrend, it should be able to keep climbing higher and be able to power through the $65 region.
As of this writing, John Kmiecik does not own any shares mentioned here.
