Dear Reader,

Yesterday, we looked at a Daily Price Chart of Home Depot, Inc., noting that the stock’s 24/52 Day MACD is trading above the 18-Day EMA signaling a ‘Buy’.

For today’s Trade of the Day e-letter we will be looking at a daily price chart for GMS Inc. stock symbol: GMS.

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

GMS Inc. distributes wallboard, ceilings, steel framing and complementary construction products in the United States and Canada. The company offers ceilings products, including suspended mineral fibers, soft fibers, and metal ceiling systems primarily used in offices, hotels, hospitals, retail facilities, schools, and various other commercial and institutional buildings. 

Now, let’s begin to break down the Daily Price chart for GMS stock.

Below is a Daily Price chart with the 50-Day EMA and 100-Day EMA for GMS.

50-Day EMA and 100-Day EMA ‘Buy’ Signal

The 50-Day Exponential Moving Average (EMA) and 100-Day EMA are moving average indicator lines that can provide buy and sell signals when used together. When the shorter-term 50-Day EMA crosses above or below the longer-term 100-Day EMA, this provides either a buy or sell signal depending on which direction the stock price is moving.

  • 50-Day EMA line Above 100-Day EMA = Price Uptrend = Buy signal
  • 50 Day EMA line Below 100-Day EMA = Price Downtrend = Sell signal

When the 50-Day EMA (blue line) crosses above the 100-Day EMA (red line) this indicates that the stock’s buying pressure has begun to outweigh the selling pressure signaling a ‘buy’ signal. When the 50-Day EMA crosses below the 100-Day EMA this indicates that the selling pressure has begun to outweigh the buying pressure signaling a ‘sell’ signal.

Buy GMS Stock

As the chart shows, on November 30th, 2022, the GMS 50-Day EMA, crossed above the 100-Day EMA.

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

Now, as you can see, the 50-Day EMA is still above the 100-Day EMA meaning the ‘buy’ signal is still in play.

As long as the 50-Day EMA remains above the 100-Day EMA, the stock is more likely to keep trading at new highs and should be purchased.

Our initial price target for GMS stock is 79.50 per share.

75.7% Profit Potential for GMS Option

Now, since GMS’s 50-Day EMA is trading above the 100-Day EMA this means the stock’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a GMS 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 GMS 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 GMS option example, we used the 1% Rule to select the GMS 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 GMS in-the-money option strike price, GMS 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 GMS stock is flat at 73.55 at option expiration, it will only result in a 5.5% loss for the GMS 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 GMS on 8/9/2023 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 GMS stock increases 5.0% at option expiration to 77.23 (circled), the call option would make 35.1% before commission. 

If GMS stock increases 10.0% at option expiration to 80.91 (circled), the call option would make 75.7% before commission and outperform the stock return more than 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.

Brand-New Program from Chuck!

Chuck Hughes has just launched his exciting new trading service program, Lightning Trade Alerts. This new service focuses on low-cost & short-term options trade.

Members will receive hand-picked options trades from the 10-Time Trading Champion, Chuck Hughes.

Call our team at 1-866-661-5664 or 1-310-647-5664 to join or CLICK HERE to schedule a call! 

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

Have any questions? Email us at dailytrade@chuckstod.com

*Trading incurs risk and some people lose money trading.