December 5, 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 small composite gain while the market indices have fallen by 14%. 

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ULTA is More than Skin Deep

Ulta Beauty (ULTA) reported impressive earnings on Thursday after the bell that beat estimates on all counts. Earnings came in more than a dollar higher than expectations, while revenue beat by more than 4%. Same-store sales came in a whopping 60% above the analyst number. Moreover, ULTA raised full-year guidance for both earnings and sales. Significantly, the common complaints of supply chain constraints and slower consumer spending were absent from ULTA’s report and follow-up call.

Analysts cheered the news, hitting the stock with several target price increases, though there were no rating upgrades. Even so, the consensus price target is just a mere 4% above ULTA’s Friday close, while more than half the covering analysts rate the stock a hold. This suggests that future upgrades and target increases are possible, which could give the stock a boost.

Despite the solid report, ULTA was flat on Friday. Perhaps this is because the stock is on an impressive 26% rally since late October. In fact, ULTA hit an all-time high on Friday. This rally has been tracked by the 20-day moving average, although the trendline has not been tested for the past month. We are going with a safer trade this week, going further out of the money than usual with the short strike that is sitting right on the 20-day, as shown in the chart.

This trade is based on ULTA continuing its rally on the heels of a strong earnings report. That said, we are giving the stock about 7% of downside room before the spread moves into the money. If you agree that ULTA will continue its rally – or at least remain atop the 20-day (blue line) - consider the following trade that relies on the stock staying above $440 (red line) through expiration in seven weeks:

Buy to Open the ULTA 20 Jan 435 put (ULTA230120P435)
Sell to Open the ULTA 20 Jan 440 put (ULTA230120P440) for a credit of $1.00 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $471.33 close. Unless ULTA surges 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 $98.70. This trade reduces your buying power by $500, making your net investment $401.30 per spread ($500 - $98.70). If ULTA closes above $440 on Jan. 20, both options will expire worthless and your return on the spread would be 25% ($98.70/$401.30). 

Testimonial of the Week

I’ve always had the greatest respect for Terry’s experience and teachings. There are numerous individuals now trying to sell option schemes. This new guy sending out emails, (name deleted), charging $5000 knows just enough to be dangerous–his free videos are bogus! In my humble opinion, Terry’s one of the few that’s got it right.

~ Robert Yates

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Happy trading,

Terry