For those seeking out the best stocks to accumulate, Enovix might be a strong candidate now. The battery maker has been touted as a new force in electrical power equipment with its management changes last year. So, let's consider a diagonal spread trade in Enovix stock.
Enovix Stock Today
Enovix has recently cleared another technical benchmark with its Relative Strength Rating now holding well above 90.
In the current formation, a potential retrace into a higher low makes for a new buy point — just above the 50-day moving average — near the 15 price level.
The U.S. CPI data released Wednesday gave fuel to the fire of the breakout rally after some weeks of market congestion. The data sent traders after the buy buttons everywhere. The battle between folks who say this is a bear market rally or a bull market is unnecessary if we do the prudent thing: Follow price and fundamental strength.
Enovix stock actually shows quite poor stock market leadership among peers. ENVX takes the No. 16 spot in IBD's electrical power and equipment industry group, according to IBD Stock Checkup.
However, its chart tells a different story.
In late June, Enovix stock cleared a deep cup-style base with a 15.48 proper buy point. This base began to form in April. The chart shows that the small cap has yet to make 52-week highs.
But using option configurations that allow participation in an uptrend with controlled downside remains an anchor for choosing option structure — especially in this market, which continues to hold its confirmed upward trend.
As we look at the option toolbox, the diagonal spread trade — a rendition of the calendar spread — allows for a potential pullback and a resumption of trend
Stock Market Forecast For Next 6 Months: What The Pros Are Watching Closely
Enovix Stock Today: Playing The Diagonal Spread
Let's set up this trade in Enovix stock in the following manner:
- Sell to open one ENVX Aug. 18 expiration call with a 25 strike price.
- Buy to open one ENVX Oct. 20 22.50 call.
This specific type of calendar formation allows us to take advantage of potential downside pressure. Such selling might appear over the summer and benefits our strategy to use the proceeds received from the call sold.
The lovely thing about these types of spreads? If Enovix stock moves early in the trade and sharply in the direction of your trade (bullish, in this case), then the spread will increase in value before the pressure of time weighs upon the position.
As a reference, consider last week's trade in Adobe. Even as the stock's price has moved into the short strike, the option position is growing in value. This is in large part due to the element of time in our favor.
Total debit spent for this new trade in Enovix stock totals $1.80 per spread. This trade has a maximum risk of $1.80, plus commissions, regardless of price movement. The break-even price (before commissions) is $24.30. To calculate this, take the long call strike price of 22.50 plus the cost of the spread.
The maximum return is potentially infinite if the trader takes delivery of Enovix stock at the strike and shares continue to rise over time.
Defending The Trade
Stock-hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself in the current economic backdrop. I also use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD. Plus, as with many of the tech picks into the second half of the year, expectations of slowing motion drive the trade analysis.
Any bursts of price could push us to the next leg up. Yet if the price action fades, our debit exposure is limited.
This spread holds a short call in the front month (August) and a long call in the forward month (October). The risk of $1.80 per set of contracts sets the maximum loss and remains fixed, as the strength of the position lies in taking advantage of potential near-term weakness by using the proceeds of one call to fund future expansion in the trade.
To identify key chart levels, let's start with the near-term resistance zone that sits near 26. This spread formation will begin to erode into negative returns if prices move above 25 as we get closer to expiration.
Trading Scenarios For ENVX
What could happen from here? Let's consider these scenarios.
- Stock moves higher in the front month of August: I choose to use the October call to contain my risk.
- Enovix stock moves lower and I lose 50% of the price of the premium of $1.80: I exit the trade using simple stop-loss rules for exit.
- Stock stays within the region below 25 until after the Aug. 18 call's expiration: Now I own the October call at an excellent discount.
What To Do During A Sharp Drop
In addition, if prices make a turn for the worse, or hold steady, I can now sell another call with a September expiration against the October 22.50 call, further reducing my cost of entry into the position.
Early moves in any kind of calendar spread may need a little wiggle room. After all, volatility will play a part in the value of your position.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Finally, be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
