5 Blue-Chip Stocks for Options Bulls – Schaeffers Research (blog)

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While it’s been a rather bumpy June for the U.S. stock market, the Dow Jones Industrial Average (DJIA) is on pace for its longest quarterly win streak in two decades. What’s more, while the Dow itself could outperform after the July 4 holiday, five blue-chip stocks could be flashing “buy” right now: iPhone maker Apple Inc (NASDAQ:AAPL), credit card issuer Visa Inc (NYSE:V), home improvement retailer Home Depot Inc (NYSE:HD), consumer goods giant Procter & Gamble Co (NYSE:PG), and insurance stock Travelers Companies (NYSE:TRV). Further, one of those stocks has been the best to own in the second half of the year, looking back over the last decade. Below, we’ll take a look at AAPL, V, HD, PG, and TRV, and dissect which blue chips offer the best bargains for short-term options traders.

Dow After Independence Day

Over the last 10 years, the Dow has been stronger than usual in the three sessions after July 4, according to data from Schaeffer’s Senior Quantitative Analyst Rocky White. Specifically, the Dow has averaged a three-day return of 0.23% after the holiday, compared to an anytime average three-day return of just 0.04%. However, the Dow’s win rate after July 4 has been just 40% — smaller than its anytime three-day win rate in the past decade.

dow after july 4

It’s also encouraging that the Dow Jones Industrial Average is in the black year-to-date (YTD). In the past 50 years, the Dow has been higher YTD at the July 4 marker 30 times. In those years, the DJI averaged a three-day return of 0.16% after Independence Day, and was positive 57% of the time. In the years where the Dow was in the red YTD on July 4, it averaged a loss of 0.21% in the subsequent three sessions, and was higher just 35% of the time.

dow jones industrial average july 4 week

AAPL, V Stocks Could Heat Up Soon

Apple is just one of the so-called FAANG stocks that tend to heat up in the dog days of summer. AAPL stock has been among the best to own in July, going back 10 years. Further, AAPL has averaged a third-quarter gain of 9.93%, with a win rate of 80%. At last check, the shares were 0.4% higher at $144.31, after finding support in the $142 area, which represents a 23.6% Fibonacci retracement of the stock’s rally from mid-2016 to its May 15 record high of $156.65.

Of all the blue chips, AAPL may boast the most attractive options set-up. The stock sports a Schaeffer’s Volatility Index (SVI) of 20%, which is higher than just 26% of all other readings from the past year, suggesting Apple’s short-term options are attractively priced, from a historical volatility standpoint. Plus, AAPL’s Schaeffer’s Volatility Scorecard (SVS) of 99 indicates the stock has handily exceeded options traders’ volatility expectations during the past year.

Visa is also a historical standout in the third quarter. Going by win rate, V stock ranks No. 3 of all S&P 500 Index (SPX) components, ending the third quarter in the black 89% of the time in the past 10 years. On average, Visa has gained 2.54% over the third quarter. More recently, V stock has rallied roughly 21% in 2017, touching a record high of $96.60 earlier this month. The equity’s 40-day moving average has emerged as support on pullbacks, and has ascended into the $94 region. Visa stock was last seen flat at $94.42.

HD, PG, TRV Stocks Outperform in 2H

Over the past 10 years, Home Depot has ended the second half of the year in positive territory 80% of the time, averaging a gain of 10.68%. HD stock has surged more than 14% YTD, but has pulled back since notching a record high of $160.86 in mid-May. However, Home Depot shares are now testing support at their 80-day moving average. After HD stock’s last seven pullbacks to this trendline, the shares went on to rebound 2.74%, on average, over the next month, and were positive 67% of the time, according to White. At last check, Home Depot stock was 0.8% higher at $153.40.

Traders looking to roll the dice on another boost for HD can pick up short-term options at a relative bargain. The stock’s SVI of 16% is below 76% of all other readings from the past 12 months, while its SVS of 79 suggests Home Depot stock has made bigger-than-expected moves on the charts during the past year, relative to what the options market priced in. 

Procter & Gamble stock has rallied from July 1 to Dec. 31 in nine of the past 10 years, averaging a gain of 8.58% over this time frame. PG has soared 34% since its mid-2015 bottom, marking a series of higher highs and lows, with its 320-day moving average emerging as support. The shares peaked at $92 in mid-March, but have since taken a breather, last seen 0.2% higher at $87.16. 

Finally, Travelers stock has been the best to own in the second half, looking back a decade. The blue chip is the only S&P 500 stock to boast a 100% win rate during this time frame, averaging a healthy gain of 9.86%. TRV stock has been in a channel of higher highs and lows since 2011, and quietly touched a record peak of $129.60 on June 16. At last check, Travelers shares were fractionally lower at $126.14.