On Friday, we looked at a Daily Price Chart of TJX Companies, Inc., noting that the stock had retraced into the Keltner Channel ‘Buy Zone’.
For today’s Trade of the Day e-letter we will be looking at a monthly chart for Eaton Corp., stock symbol: ETN.
Before breaking down ETN’s monthly chart let’s first review what products and services the company offers.
Eaton Corporation plc operates as a power management company worldwide. The company’s Electrical Americas and Electrical Global segment provides electrical components, industrial components, power distribution and assemblies, residential products, single and three phase power quality and connectivity products, wiring devices, circuit protection products, utility power distribution products, power reliability equipment, and services.
Now, let’s begin to break down the monthly chart for ETN stock.
Below is a 10-Month Simple Moving Average chart for Eaton Corp.
Buy ETN Stock
As the chart shows, in October 2022, the ETN 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for ETN 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 ETN is 235.00 per share.
115.5% Profit Potential for ETN Option
Now, since ETN’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 ETN 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 ETN 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 ETN option example, we used the 1% Rule to select the ETN 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 ETN in-the-money option strike price, ETN 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 ETN stock is flat at 227.45 at option expiration, it will only result in a 6.4% loss for the ETN 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 ETN on 8/28/2023 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 ETN stock increases 5.0% at option expiration to 238.82 (circled), the call option would make 54.5% before commission.
If ETN stock increases 10.0% at option expiration to 250.20 (circled), the call option would make 115.5% before commission and outperform the stock return more than 11 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 email@example.com
*Trading incurs risk and some people lose money trading.