Take a look at this example of a trade I just spotted. Finding great bargains that are overbought or oversold doesn’t have to be as hard as it may seem. Let me show you what I noticed on a chart of United Microsolft Corp. (MSFT).
Be sure to check out the update on a previous trade at the bottom of this message.
On the chart below, I included the Channel Commodity Index indicator which I use to help me spot powerful reversals that are setting up. If you want more information on the CCI click here.
On the CCI at the bottom of the chart you’ll see highlighted areas that look like fins. These tell us there is a high likelihood that the price is heading up.
In this example we want CCI on MSFT to go DOWN to create a clear fin shape. We also want the price to go DOWN to at least $395 before entering a trade. The first target would be $385.
To buy stock shares of MSFT in this example, the price would be approximately $385.31. You would wait until price found a bottom before buying stock.
That said, option trading offers the potential of a smaller initial investment and higher percentage gain even when price is expected to rise or fall. Let’s take a look.
If you bought one PUT option contract covering 100 shares of MSFT with a June 21st expiration date for the 395 strike, premium would be approximately $11.70 today, or a total of $1170 per contract. If the stock price FELL the expected $10 the premium might increase approximately $5.00 to $1670 per share on your 100-share contract. This is a 43% gain over a short time.
Options can offer a win, win, win trade opportunity. They often offer a smaller overall investment, covering more shares of stock, and potentially offer greater profits.
I love to trade, and I love to teach. It is my thing.
Wendy
Past potential trade update:
Last week we discussed buying IBM puts. On 4-26 the May 17th 167.50 was $3.70. You could have sold on 5-2 for $6.50, a 76% profit.
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