Dear Reader,

Today I’m going to show you a stock I found using one of my favorite indicators. After showing how the indicator works, I’ll even walk you through an option trade that allows me to “lock-in” profit potential on the trade at the time of entry.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for AZEK Company Inc. (AZEK). The AZEK Company Inc. engages in the design, manufacturing, and selling of building products for residential, commercial, and industrial markets in the United States and Canada. It operates through two segments: Residential and Commercial. The Residential segment designs and manufactures engineered outdoor living products, such as decking, railing, trim and molding, siding and cladding, pergolas and cabanas, and accessories.

Now, let’s take a look at the Keltner Channels chart below and I’ll walk you through how they work and why I use them every day.

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.

The AZEK daily price chart shows that the stock is in a strong price uptrend and has become overbought several times. You can see this as AZEK has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when AZEK 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.

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Profit if AZEK is Up, Down or Flat

Now, since AZEK 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 AZEK call option spread.

For this option spread, the calculator analysis below reveals the cost of the spread is $315 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if AZEK stock is flat or up at all at expiration the spread will realize a 58.7% return (circled). 

And if AZEK stock decreases 7.5% at option expiration, the option spread would make a 38.5% return (circled). 

The prices and returns represented below were calculated based on the current stock and option pricing for AZEK on 3/18/2024 before commissions.

Due to option pricing characteristics, this option spread has a ‘built in’ 58.7% profit potential when the trade was identified*.

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 profit opportunities just like this one.

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

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*Trading incurs risk and some people lose money trading.