Subject: Get Into the Zone

Dear Friend,

Today we bring you a brand new Trade of the Week! Each week we share a new trade idea directly from our trading team.

Terry

September 27, 2021

Week 666

Get Into the Zone

Car parts retailer AutoZone (AZO) reported earnings on Tuesday morning that easily blew away expectations on both the top and bottom lines. In fact, earnings came in just shy of $36 per share, while analysts projected around $30. The impressive numbers reflect AZO’s solid positioning of catering to the DIY crowd amid skyrocketing used-car prices. The stock reacted by jumping nearly 7% throughout the rest of the week. And it hit an all-time high on Thursday.

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The analyst community greeted the news with a carload of target price upgrades. The most extreme was J.P. Morgan ratcheting its price from $1,665 to $1,900, a 14% increase. Citigroup raised its estimate to $1,950. AZO closed the week at $1,695, leaving 12% of upside room to the Citigroup figure. That’s a lot, given that the shares have already risen 43% this year.

AZO’s 50-day moving average currently sits at $1,605. While the stock tends to run through this trendline both ways, it remains a good overall gauge of AZO’s strength. Thus, we’re playing a put credit spread with the short strike below the 50-day.

If you agree that AZO will stay above the 50-day moving average (blue line in chart), consider the following trade that relies on the stock remaining above 1600 (red line in chart) through expiration in eight weeks.

Buy to Open AZO 19Nov 1590 put (AZO211119P1590)
Sell to Open AZO 19Nov 1600 put (AZO211119P1600) for a credit of $3.25 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when AZO was trading at $1695. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread. Each spread would then yield $323.70. This trade reduces your buying power by $1,000 and makes your net investment $676.30 ($1,000 – $323.70). If AZO closes above $1,600 on November 19, both options will expire worthless and your return on the spread would be 48% ($323.70 / $676.30).

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Terry

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Subject: Get Into the Zone

Get Into the Zone