Nothing moves in a straight line. For investors who make short-term bets on a company, this fact can produce large losses quickly. But for investors willing to play trends, waiting for a pullback on a stock in a long-term uptrend can prove worthwhile.
That’s especially the case when a short-term drop has no apparent rationale behind it. That can happen fairly often in the tech space, as investors look to lock in profits quickly.
That appears to be the case with QuantumScape (QS). The electric-vehicle battery company saw its shares drop 40 percent on the first trading day of the year. Without an explanation why, whether from market traders or the company management, it simply appears to be a bump in the road for shares.
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That’s because shares have been on a monster rally. The recent drop still leaves the stock well over its 50-day moving average, a bullish sign. And the big drop has been followed by a slight move higher on Tuesday. Chances are the rally in shares will continue, and the stock will outperform the overall market on the next leg higher for stocks.
Action to take: The July 2021 $80 calls are a solid speculation here. While shares would need a big rally to get back to $80, the option is priced at about $10.30. If shares went back to their all-time highs in the $130 range, the option would be worth $50 at expiration, for a five-fold jump.