In Options Testing Lab we recently looked at Darden Restaurants (DRI) and tried to find a credit spread that was worth our time. The stock came up on our scanner because it has been trading higher over multiple time frames, including the last quarter and month at the time of the scan. It then came back into an area of support and started moving higher.
Let’s look at the chart when we entered the trade on 6/27. The longer time frame showed the stock was moving higher and I was stalking the stock to get a pullback.
The pullback occurred (right side of the chart) and I noticed that it was getting support at the 50-day moving average. At the time, the broader market was trading higher and this stock started to break higher.
It was time to look for a credit spread. The cost of the stock prohibited selling a cash-secured put, so we turned it into a credit spread. At the time, the stock was trading around $163, and the lows of the last few days were just below $160, so we selected to sell the 21 JUL $160 put. We then bought the 21 JUL $155 put for a total credit of $1.20. Since the spread was $5 wide, this trade cost us a total of $3.80.
A few days later, after a nice holiday break, DRI traded up to $167.34. We exited on 7/5 buy purchasing the spread back for 0.45.
We closed the trade in six days with a profit of 62%!
Editor, Filthy Rich Dirt Poor
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