Definitive ‘Buy’ Signal for A. O. Smith

Dear Reader,

On Friday, we looked at a Daily Price Chart of Copart, Inc., noting that the stock’s OBV line is sloping up, validating CPRT’s recent bullish trend.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for A. O. Smith Corp. stock symbol: AOS.

Before breaking down AOS’s monthly chart let’s first review what products and services the company offers.

A. O. Smith Corporation manufactures and markets residential and commercial gas, heat pump and electric water heaters, boilers, tanks, and water treatment products in North America, China, Europe, and India. It operates through two segments, North America and Rest of World.

Now, let’s begin to break down the monthly chart for AOS stock.

Below is a 10-Month Simple Moving Average chart for A. O. Smith Corp.

Buy AOS Stock

As the chart shows, in January, the AOS 1-Month Price, crossed above the 10-Month simple moving average (SMA).

This crossover indicated the buying pressure for AOS stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish uptrend.

Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!

As long as the 1-Month price remains above the 10-Month SMA, the stock is more likely to keep trading at new highs and should be purchased.

Our initial price target for AOS is 79.50 per share.

138.4% Profit Potential for AOS Option

Now, since AOS’s 1-Month Price is trading above the 10-Month SMA this means the stock’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an AOS 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 AOS 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 AOS option example, we used the 1% Rule to select the AOS 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 AOS in-the-money option strike price, AOS stock 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 AOS stock is flat at 75.23 at option expiration, it will only result in a 2.2% loss for the AOS 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 AOS on 7/17/2023 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 AOS stock increases 5.0% at option expiration to 78.99 (circled), the call option would make 68.1% before commission.

If AOS stock increases 10.0% at option expiration to 82.75 (circled), the call option would make 138.4% before commission and outperform the stock return nearly 14 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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