When stocks that are widely followed by institutions breakout of multi-year consolidation patterns they can explode higher.
These moves can create massive low risk gains for the savvy trader.
Today’s trade idea is an example of this type of setup (and it’s simple).
Pepsico (PEP) may sound like a ‘big boring’ company, but if you trade options on it you can reap nice gains.
For example, if you look at the chart below, you’ll see a recent move from about $117-$122 after it broke out of a consolidation pattern.
If you were in the May 120 calls during that move, you would have doubled your money in 7 trading days.
There’s an even bigger opportunity now.
The recent flag pattern is a retracement from a breakout of a range that began in January 0f 2017!
Therefore, a resumption of the breakout could lead to huge move up.
This stock has waited 2 years for this!
Plus, PEP will announce earnings on April 17th, so that could be the ideal catalyst to get this stock moving.
This sets up the potential for a breakout and run up into the 17th.
The plan is to buy an inexpensive option, the May 125 call, if PEP trades over $122.75, and look for a breakout move up of $4-$5 before April 17th.
If the breakout leads to a gain of 50%-100% I would sell half the position.
IMPORTANT: I would not hold any option position into earnings that you are not willing to lose your entire investment in!
Therefore, the plan is to sell a portion of the position at a profit to reduce the risk of holding into earnings.
Another way to reduce risk on a run-up in price would be to sell the 130 calls to create a spread.
If the earnings announcement creates a breakout the move could be massive and fast!
And the 125 calls could double, triple or even much more.
Remember however, that a negative earnings announcement and you calls will likely be worth $0.
That’s why there is a plan to try to take profits before the 17th.
If there is not a chance to take profits, then it’s best to just exit before the announcement.
For a stop, I would exit the position if it gets to a 30% loss.
Rick Nartarian, Chief Investment Officer
Darwin Wealth Creation