Dear Reader,
This morning, I was scanning the market and came across this great looking stock chart, did you happen to catch it too? If not, don’t worry, I have a full breakdown below.
The trade I spotted earlier is for L3Harris Technologies Inc. symbol: (LHX).
What made LHX stock standout is what I noticed in its stock chart. After pulling up LHX’s chart I noticed that the stock is signaling a powerful ‘Buy’ signal!
Below is a snapshot of LHX’s current stock chart. Let’s dive in so I can show you what made me stop scrolling when I saw this chart.
When I looked at this chart, I saw that back in November ‘23, LHX shares experienced a bullish breakout to the upside which generated a brand new technical signal for the stock.
In November ’23, LHX’s 1-Month Price finished the month trading above the 10-Month SMA and following my PowerTrend system, this qualifies as a ‘Buy’ signal for the stock.
Now, you may ask yourself, “Well the buy signal occurred in last November, have I missed the chance to trade this?” Don’t worry because we still have an opportunity to take advantage of this stock’s move, and I’ll tell you why.
This crossover indicated the buying pressure for LHX stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish uptrend and as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!
When stocks break out to the upside like this, the bullish trend can often last longer than one might think.
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How I Would Look to Trade It
Now that we have identified the stock that we want to trade and we have pinpointed our entry point, the next question is how do we actually want to gain exposure to this trade?
Of course you could simply buy the stock shares, which we sometimes do, but, many times when we spot a setup like this we want to add a bit more leverage to our position to unlock more explosive profit potentials.
With a setup like this, we like to find a call option to purchase which would provide us with a little more leverage on our trade. By doing this, should the bullish trend continue, our trade is positioned to produce higher profits when compared to just owning the underlying stock shares.
When selecting which call option to purchase, I often rely on my 1% Rule to help narrow down my choice of option strikes. The 1% Rule helps me select an in-the-money option that has a higher probability of producing a profit when compared to an at-the-money or out-of-the money option. Once I have one selected I will vet the trade using my Call Option Purchase calculator to determine the trade’s profit potential.
Below is a snapshot of my Call Option Purchase Calculator that shows the profit potential analysis for my trade. This example examines a range of LHX shares remaining flat up to a 12.5% increase at option expiration.
164.9% Profit Potential for LHX Option
The trade analysis shows that if LHX shares were to increase by just 1% at option expiration, this trade would make 15.0%.
Then looking at a few of the bigger potential moves, if LHX shares were up 5.0% at option expiration, our option would be set to profit 81.6%!
If that doesn’t sound good enough, get this, if LHX shares were up 10.0% at option expiration, this call option would be set to produce a 164.9% profit! That means the call option would outperform the stock more than 16 to 1!
By following my 1% Rule to select which call options to purchase, this has helped me in the past to juice my trade’s profit potential, just like in the example shown above. Additionally, the 1% Rule helps to increase the odds that the option will profit as the underlying stock only has to increase by 1% for the option to begin profiting.
The Hughes Optioneering Team is here to help you identify high-probability trades just like this one.
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Wishing You the Best in Investing Success,
Chuck Hughes
Editor, Trade of the Day
Have any questions? Email us at dailytrade@chuckstod.com
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