5 Option Ideas for Walgreen

09/05/2012 8:00 am EST


Greg Harmon of Dragonfly Capital outlines five trading ideas based on technical analysis of the underlying stock.

Walgreen (WAG) is building a tight bull flag, consolidating the gap up from move following the mid-July agreement with Express Scripts (ESRX). The Bollinger bands are very tight, forecasting a move soon, and with the 50-day Simple Moving Average (SMA) crossing up through the 200-day SMA recently—a Golden Cross—the bulls are favored.

The Relative Strength Index (RSI) is also bullish, and the Moving Average Convergence Divergence indicator (MACD) is negative, but moving back higher.

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This technical analysis supports a break higher. Rounding out the picture, the three-box reversal Point and Figure (PnF) has a price objective of 51.

There is resistance higher at 36.60 and 37.85, followed by 39 and 40, and the Measured Move out of the flag takes it between those to 39.45. Support lower comes at 35 and 34.40, followed by 33.40, 31.90, and a gap fill to 30.97. The trigger is a move over 36.20.

  • Option trading idea 1: Buy the September 36 Calls (offered at 48 cents late Friday) on the trigger.

  • Option trading idea 2: Buy the October 36 Calls ($1.11) on the trigger, and sell the October 40 Calls as the stock hits 37.85.

  • Option trading idea 3: Sell the October 33 Puts (35 cents) on the trigger.

  • Option trading idea 4: Combine ideas 3 and 4 for a 36/40 Call Spread Risk Reversal selling the 33 Put (76 cents).

  • Option trading idea 5: Buy the October/January 39 Call Calendar Spread (58 cents) and sell October 34 Put (56 cents) for a longer-term trade.

  • Bonus Trade Idea: Buy the stock on the trigger with a 75-cent trailing stop.

Greg Harmon can be found at Dragonfly Capital.

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