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Overbought Stock of the Day: Magna International (MGA)

Overbought Stock of the Day: Magna International (MGA)

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  • Auto part supplier Manga International (MGA) has been on a tear lately. Car sales are up as consumers look to acquire vehicles of their own rather than ride share. And existing vehicles need repairs. That spells a profit for automakers like Magna—but traders have sent shares to overbought levels.

    Although shares are now flat over the past year, the past month has seen shares rally nearly 20 percent, a huge move for the firm. Shares are now reading as overbought on the relative strength index, or RSI, with a recent read near 75. The last time shares were over 70 on the RSI, a month-long decline ensued.

    Shares have also diverged far from their usual proximity to the company’s moving averages. It’s likely that when a pullback does occur, shares will drop by at least 10 percent.

    Action to take: The December $50 puts have a bid/ask spread of around $1.40 right now. That’s an inexpensive bet that would move higher if shares head back to $50, right around the 50-day moving average.

    Traders should look for a drop in the next few weeks, and a chance to make mid-to-high double-digit gains. As with most options trades, don’t be afraid to take a quick profit and run, particularly when betting on a move down.

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