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This morning I am recommending a bullish trade on 3M Company (NYSE:MMM).
Last week I said it was unclear whether the market would head higher or lower. My indicators gave sell signals, but personally, I was leaning toward the bullish side.
We have a Federal Reserve that is dovish and willing to keep the federal funds rate steady for the rest of 2019, market breadth (the ratio of advancing stocks to declining stocks) is healthy and the major indices remain above their major moving averages.
Yesterday, the S&P 500 moved higher, which is a good sign. I still don’t know where we’re headed in the near term, but MMM looks like a good target for a bullish put credit spread.
A Bearish Outlook?
An analyst from J.P. Morgan (NYSE:JPM) has reiterated his bearish view of MMM, saying he sees evidence of “structurally lower profit growth.” The stock did miss earnings per share estimates in its past two earnings reports, which is cause for concern.
And the state of New Jersey is suing MMM, among other companies, to pay for cleanup costs from industrial contamination, which definitely isn’t good news.
Still, even after that bad news last week, the stock is retesting its recent highs at around the $212 level. And MMM is an attractive stock in the current market environment because it pays out a dividend.
I also like the technical picture. MMM has support that should keep it above our strike prices in the short term.
Support at $198
I’ve already mentioned that MMM is retesting resistance at around the $212 level. If it is rejected at that level, it will likely head lower, and I think it has enough support to keep our trade profitable.
Daily Chart of 3M Company (MMM) — Chart Source: TradingView
The last time MMM bounced off the $212 level, it dropped back down to $198 before turning back to the upside. I expect that support level to hold this time as well, which is why I’m recommending a put credit spread on MMM.
Using a spread order, sell to open the MMM April 26th $185 put and buy to open the MMM April 26th $165 put for a net credit of about $0.45.
Note: There are several April expirations available for MMM options. Be sure you are opening the weekly options that expire on Friday, April 26, 2019.
About Ratio Call Debit Spreads
A put credit spread is a bullish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
This is a bullish trade in which you want the underlying share price to stay above the upper strike price of the spread. In this case, we want MMM to stay above $185 through the April 26 expiration.
I recommend that you close this position and limit losses if MMM trades below $188 prior to the April 26 options expiration. For the sake of illustration, I marked that level on the daily chart above.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.