Yesterday, we looked at a Daily Price Chart of the Lowe’s Companies, Inc., noting that the stock’s 50-Day EMA is trading below the 100-Day EMA signaling a ’Sell’.
For today’s Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Bath & Body Works, Inc. stock symbol: BBWI.
Before breaking down BBWI’s MACD chart let’s first review what products and services the company offers.
Bath & Body Works, Inc. operates a specialty retailer of home fragrance, body care, and soaps and sanitizer products. The company sells its products under the Bath & Body Works, White Barn, and other brand names through specialty retail stores and websites located in the United States and Canada, as well as through international stores operated by partners under franchise, license, and wholesale arrangements.
MACD Indicator confirms Price Momentum
The BBWI daily price chart below shows that BBWI is in a price downtrend as the 24/52 day MACD line (black line) is below the 18-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart.
MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock’s longer term 52-Day Exponential Moving Average (EMA) from its shorter term 24-Day EMA. This creates the MACD line.
MACD ’Sell’ Signal
The 18-Day EMA line functions as a buy/sell ’trigger’. When the 24/52 Day MACD line crosses above the 18-Day EMA line it indicates positive momentum and higher prices for the stock. When the 24/52 Day MACD lines crosses below the 18-Day EMA it indicates negative momentum and lower prices for the stock. MACD is more of a leading indicator than a moving average cross over which tends to lag price movement.
MACD Histogram shows Acceleration of Momentum
Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 24/52 Day MACD and the 18-Day EMA.
When a crossover initially occurs, the histogram’s bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock’s momentum. When the histogram’s bars begin to shrink this indicates a narrowing of the gap between the 24/52 Day MACD and the 18-Day EMA and a slowing of the stock’s momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon.
Sell BBWI Stock
As long as the 24/52 Day MACD line remains below the 18-Day EMA, the stock is more likely to keep trading at new lows in the coming days and weeks.
Since BBWI’s bearish run is likely to continue, bearish positions should be initiated.
Our initial price target for BBWI stock is 29.20 per share.
71.3% Profit Potential for BBWI Option
Now, since BBWI’s 24/52 Day MACD is trading below the 18-Day EMA this means the stock’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a BBWI put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat BBWI price to a 12.5% decrease.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following BBWI option example, we used the 1% Rule to select the BBWI option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select a BBWI in-the-money option strike price, BBWI stock only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if BBWI stock is flat at 32.10 at option expiration, it will only result in a 6.0% loss for the BBWI option compared to a 100% loss for an at-the-money or out-of-the-money put option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for BBWI on 6/16/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.
For this specific put option, the calculator analysis below reveals if BBWI stock decreases 5.0% at option expiration to 30.50 (circled), the put option would make 32.7% before commission.
If BBWI stock decreases 10.0% at option expiration to 28.89 (circled), the put option would make 71.3% before commission and greatly outperform the stock return.
The leverage provided by put options allows you to maximize potential returns on bearish stocks.
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.
Limit Risk While Trading Stocks and Options
Given the current market conditions, I know people are wondering if there is a way to profit from stocks and options without taking on a lot of risk.
If you’re like me, you don’t want to take big risks and possibly wipe out your entire account with one wrong move. That’s why I created the Inner Circle Trading Service.
The Inner Circle provides members with proven, reduced-risk strategies and actionable trades that can help them become more successful traders.
Let me help you today. Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join or you can CLICK HERE to schedule a call!
Wishing You the Best in Investing Success,
Editor, Trade of the Day
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