An Intuitive Trade | Terry’s Tips

Surgical (ISRG) – the maker of the da Vinci robotic surgical system – reported
earnings on Tuesday that showed a solid increase from a year earlier and beat
estimates, though not by much. The company shipped 72% more da Vinci units
compared to a year earlier. Also, the company tightened – but did not increase
– its 2021 guidance. The report was accompanied by Johnson & Johnson (JNJ)
announcing a two-year delay in developing a rival soft-tissue surgical robot.

Though there were no upgrades, analysts apparently approved of the numbers through price target increases. One went as high as $381 (ISRG closed at $341.52 on Friday). The stock reacted well to the report, gaining 2.8% through the end of the week. In the process, the shares moved above the 20-day moving average for the first time in six weeks. The stock has tended to respect the 20-day, using it as support during a three-month, 34% rally and as resistance during the recent three-week decline. Note that the short put of our credit spread is below this trendline.

ISRG Chart

you agree that ISRG will stay atop its 20-day moving average (blue line in
chart) line in chart), consider the following trade that relies on the stock
remaining above $330 (red line in chart)  (through expiration in four weeks.

to Open ISRG 19Nov 325 call (ISRG211119C325)
Sell to Open ISRG 19Nov
330 call (ISRG211119C330) for a credit of $1.55 (selling a vertical)

credit is $0.02 less than the mid-point
of the option spread when ISRG was trading at $341.52. Unless the stock falls
quickly from here, you should be able to get close to this amount.

commission on this trade will be only $1.30 per spread.  Each spread would then yield $153.70. This
trade reduces your buying power by $500 and makes your net investment $346.30
($500 – $153.70) for one spread.  If ISRG
closes above $330 on November 19, both options will expire worthless and your return on the spread would
be 44% ($153.70/$346.30).

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