Yesterday, we looked at a Daily Price Chart of HSBC Holdings PLC noting the stock’s OBV line is sloping up validating its bullish trend.
For today’s Trade of the Day we will be looking at a Keltner Channel chart for Arch Capital Group Ltd. stock symbol: ACGL.
Before breaking down ACGL’s daily Keltner Channel chart let’s first review which products and services are offered by the company.
Arch Capital Group Ltd., together with its subsidiaries, provides insurance, reinsurance, and mortgage insurance products worldwide. The company’s Insurance segment offers primary and excess casualty coverages; loss sensitive primary casualty insurance programs; collateral protection, debt cancellation, and service contract reimbursement products; directors’ and officers’ liability, errors and omissions liability, employment practices and fiduciary liability, crime, professional indemnity, and other financial related coverages.
Now, let’s begin to break down the Keltner Channel chart for ACGL. Below is a Daily Price Chart and the three Keltner Channels for ACGL stock.
Buy ACGL Stock
The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether a stock is overbought or oversold. If a stock’s daily stock price is trading above the upper Keltner Channel, this signals that the stock is temporarily overbought and subject to a retracement.
Even stocks that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When a stock becomes overbought, it’s price will typically decline soon after as the inevitable profit taking occurs.
The ACGL daily price chart shows that the stock is in a strong price uptrend and has become overbought several times. You can see this as ACGL has traded above the Upper Keltner Channel on multiple occasions recently.
But, in every scenario when ACGL became overbought, the stock soon experienced a pullback.
Finding opportunities when a stock experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.
The Keltner Channel “Buy Zone” occurs when a stock is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the stock is likely to rally.
Our initial price target for ACGL stock is 54.45 per share.
Profit if ACGL is Up, Down or Flat
Now, since ACGL is trading in the Keltner Channel ‘Buy Zone’ this offers a prime trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for an ACGL call option spread.
The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in ACGL stock at option expiration.
The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads to profit if the underlying stock is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike prices used in the profit/loss calculation.
The prices and returns represented below were calculated based on the current stock and option pricing for ACGL on 2/3/2022 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $305 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if ACGL stock is flat or up at all at expiration the spread will realize a 63.9% return (circled).
And if ACGL stock decreases 7.5% at option expiration, the option spread would make a 37.9% return (circled).
Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.
A higher percentage of winning trades can give you the discipline needed to become a successful trader.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.
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Editor, Trade of the Day
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