Nobel Prize Winners Help Us Find a $125 Stock That Could be Worth $500-Plus

The PEG ratio is telling us that SI is a buy based on value. Even a more conservative estimate of the stock’s value, using a P/E ratio of 20, which is just below the seven-year average P/E ratio of SI, would indicate that SI is a buy, giving us a target of $183.

RS, shown at the bottom of the chart, confirms this signal. SI has an RS rank of 80, indicating that it has outperformed 80% of all other stocks over the past six months.

An options pricing model points us to a specific put selling trade. The January 2014 $115 put options are worth $2.25, according to the model. They are currently trading with a bid of $1.90 and an ask price of $2.90. Selling the put above $2.30 using a limit order would provide a way to benefit from a pullback in SI. Each put option covers 100 shares of stock.

If SI is below the $115 strike price when the option expires in January, selling a put creates an obligation to buy 100 shares of the stock at $115 per share. Since selling the put also provides immediate income, we can subtract that from our buy price. In this case, the cost of SI would be $112.70, about 12.3 times next year’s estimated earnings.

If SI is above $115 when the option expires, the profit on the trade is the $230 received for selling the put option. Most brokers will require a margin deposit equal to about 20% of the option’s strike price when you sell a put, or $2,300 (20% of $115 x 100 shares) in this example. So the return on investment if the put expires worthless will be 10% in less than three months.

Understanding Noble Prize-winning ideas can help individual traders generate profits. SI is one example, and the stock market offers additional opportunities nearly every day.

Recommended Trade Setup:

— Sell SI Jan 2014 115 Puts for $2.30 or more
— If SI is below $115 when the put expires, you will buy the stock at a 9.5% discount to recent prices
— If SI is above $115 when the put expires, you will have a profit of $280 for a return on investment of 10% in three months

Note: Amber uses this same strategy in her premium Income Trader service and reader emails are pouring in: “Up over 60% on average… Making about $30,000/year… An average $1,300 a month… $19,500 in the last six months…” Some have even made over $100,000 this year. Click here to learn more.

This article was originally written by Michael J. Carr and Amber Hestla and posted on ProfitableTrading.

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