Yesterday, we looked at a Daily Price Chart of ON Semiconductor Corp. noting that the stock’s 50-Day EMA is trading above the 100-Day EMA.
For today’s Trade of the Day we will be looking at a Keltner Channel chart for e.l.f. Beauty, Inc. stock symbol: ELF.
Before breaking down ELF’s daily Keltner Channel chart let’s first review which products and services are offered by the company.
e.l.f. Beauty, Inc., together with its subsidiaries, provides cosmetic and skin care products under the e.l.f. Cosmetics, e.l.f. Skin, Well People, and Keys Soulcare brand names worldwide. The company offers eye, lip, face, face, paw, and skin care products.
Now, let’s begin to break down the Keltner Channel chart for ELF. Below is a Daily Price Chart and the three Keltner Channels for ELF stock.
Buy ELF 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 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 ELF daily price chart shows that the stock is in a strong price uptrend and has become overbought several times. You can see this as ELF has traded above the Upper Keltner Channel on multiple occasions recently.
But, in every scenario when ELF 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 ELF is 125.00 per share.
69.5% Profit Potential for ELF Option
Now, since ELF is currently 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 ELF call option purchase.
The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat ELF price to a 12.5% increase.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following ELF option example, we used the 1% Rule to select the ELF 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 an ELF in-the-money option strike price, ELF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call 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 ELF is flat at 116.25 at option expiration, it will only result in a 1.2% loss for the ELF option compared to a 100% loss for an at-the-money or out-of-the-money call 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 call 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 ELF on 7/13/2023 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if ELF increases 5.0% at option expiration to 122.06 (circled), the call option would make 34.1% before commission.
If ELF increases 10.0% at option expiration to 127.88 (circled), the call option would make 69.5% before commission and outperform the stock return nearly 7 to 1*.
The leverage provided by call options allows you to maximize potential returns on bullish stocks.
The Hughes Optioneering Team is here to help you identify profit opportunities 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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Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at firstname.lastname@example.org
*Trading incurs risk and some people lose money trading.