August 8, 2022

Dear Friend,

Today we bring you our Option Trade of the Week, an idea generated by our trading team, for your consideration. But first, I would like to remind you that our proprietary 10K Strategy has generated average annual gains of 60% for the past five years in actual brokerage accounts (including all commissions) carried out for our subscribers.  In the difficult current year, our portfolios have eked out a 4% composite gain while the market indices have fallen by 14%. 

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Hard Disk Drive

Storage-device maker Western Digital (WDC) reported earnings on Friday that topped estimates on both the top and bottom lines. However, both measures fell short of the year-ago figures. More importantly, the company issued dismal guidance, blaming softer consumer spending and inventory corrections. Q1 revenue is now expected in the $3.6-3.8 billion range, far below the $4.74 billion consensus estimate. Earnings per share looks even worse, with an expected range of $0.35-0.65 compared to the $1.96 consensus.

Oddly, there were no target price changes for the stock on Friday. However, given that analysts are strongly bullish toward WDC and have a median target price of $65 (38% above Friday’s close), the weak guidance is sure to bring some price cuts, if not outright downgrades.

If you agree that WDC’s rally is over, consider the following trade that relies on the stock staying below $50 (green line) through expiration in six weeks:

Buy to Open the WDC 16Sep 52.5 call (WDC220916C52.5)

Sell to Open the WDC 16Sep 50 call (WDC220916C50) for a credit of $0.60 (selling a vertical)

This credit is $0.04 less than the mid-point price of the spread at Friday’s $47.09 close. Unless WDC drops quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $58.70. This trade reduces your buying power by $250, making your net investment $191.30 per spread ($250 - $58.70). If WDC closes below $50 on September 16, both options will expire worthless and your return on the spread would be 31% ($58.70/$191.30). 

Any questions?  Email Terry@terrystips.com

Testimonial of the Week

Well, I’ve just finished the daily program and it was absolutely fantastic! You guys have put together an excellent program. When I initially signed up, I was hoping to learn about option spreads, how to set them and when to use them. Learning how to integrate them into well-defined strategies has been a welcome bonus.

~ Jeremy C., Coffs Harbour, Australia

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Happy trading,

Terry