Overbought Stock of the Day: Applied Materials (AMAT)
Many tech stocks are trading at or near all-time highs. Most have also seen an explosion higher already this month, and may be due for a breather. One such name is Applied Materials (AMAT). Shares of this semiconductor giant are up over 25 percent since the start of the month.
Shares have moved higher so quickly that the stock is at its greatest disconnect between its moving averages in months. That’s the power of a strong move higher. Shares are also reading as overbought on their relative strength index, or RSI. The most recent reading was near 75, well into overbought territory.
Traders should beware several gaps in the share price this month, as each represents possible selloff points.
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Action to take: The January 2021 $70 puts are a reasonable bet here. That’s close to the last gap in share price, and would need less than a 10 percent drop in the share price to move in-the-money. The option last traded with a bid/ask spread near $2.06.
This trade has some time to play out, and the drop should occur before expiration. On a bigger drop to another gap in price, this option could deliver triple-digit returns. Given the difficulty of shorting overbought tech stocks, traders should consider and mid-to-high double-digit move a win here. As with most options trades, grabbing a quick profit is better than holding on and watching gains evaporate.