4 Dow Stocks For Option Bulls to Consider

Microsoft and Disney stocks are approaching their 40-day moving averages, while Merck and United Technologies stocks are near the 80-day

Mar 24, 2017 at 11:40 AM
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As the stock market's been consolidating its post-election gains, several Dow stocks have pulled back to key moving averages. In fact, based on quantified data, these trendline flirtations may be "buy" signals. Below, we'll break down four Dow stocks that have recently touched historically significant levels: Microsoft Corporation (NASDAQ:MSFT), Walt Disney Co (NYSE:DIS), Merck & Co., Inc. (NYSE:MRK), and United Technologies Corporation (NYSE:UTX).

Trendline Bounce Could Send Microsoft Stock to Higher Highs

MSFT stock recently touched its 40-day moving average. This is the eighth time this has happened in the past three years, and on 71% of these previous occasions, the shares have been higher in the subsequent week -- sporting an average return of 1.1%. One month out, two-thirds of returns have been positive, with an average gain of nearly 1.8%.

microsoft stock chart

A bounce off the 40-day trendline should help MSFT stock extend its hot streak. Up 0.7% today at $65.35, the shares are a chip-shot from their late-January record peak at $65.91. Understandably, options traders have been buying to open Microsoft calls over puts at a breakneck speed. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a top-heavy 50-day call/put volume ratio of 2.75 -- in the 87th annual percentile.

Disney Options Traders Extremely Call-Skewed

DIS stock is also approaching its 40-day moving average, and a touch of this trendline is a historically bullish signal. Specifically, after 11 prior instances, the shares have posted positive 21-day returns eight times -- with a solid average gain of 1.7%.

walt disney stock chart

DIS stock is no stranger to strong gains, either. Year-over-year, the shares have soared 15%, and at $112.48, they're a stone's throw from all-time-high territory. No wonder short-term options traders are so focused on Walt Disney calls. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.43 is just 2 percentage points from a 52-week low.

Merck Options Traders Banking on a Bounce

MRK is descending into its 80-day moving average, which is a historically bullish signal. In seven prior occurrences, the stock has managed positive one-week gains 86% of the time, with an average gain of 2.3%. Going out to 21 sessions, 71% of returns have been positive; plus, the typical advance rises to 3.6%.

merck stock chart

It appears most options traders would be happy with a technical bounce. Merck stock has cooled off since hitting a 15-year high on March 1, but speculators have placed plenty of bullish bets. The shares boast a 10-day ISE/CBOE/PHLX call/put volume ratio of 3.37, higher than two-thirds of all readings from the past 12 months.

Extreme Options Optimism on United Technologies

Finally, UTX stock isn't far from its 80-day moving average. This trendline has proven a reliable "buy" signal in the past three years. In six prior occurrences, the shares have posted positive 21-day returns 80% of the time, with an average gain of 1.7%. A repeat performance could help the stock -- last seen at $112 -- notch a new annual high, after it topped out at $114.44 on March 1.

united technologies stock chart

Options traders have shown a distinct preference for United Technologies calls over puts. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio is a top-heavy 4.84, and sits just 3 percentage points from a 12-month high. Not to mention, UTX has a SOIR of 0.38, ranking in the low 6th percentile of its annual range, underscoring the call-skew among short-term options traders.

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