Yesterday, we looked at a Monthly Price Chart for Texas Roadhouse, Inc. noting that the stock’s OBV line is sloping up, validating the recent bullish trend.
For today’s Trade of the Day e-letter we will be looking at a daily price chart for the SPDR S&P Insurance ETF symbol: KIE.
Before breaking down KIE’s daily chart let’s first review the investment objective of the ETF.
KIE, in seeking to track the performance of the S&P Insurance Select Industry Index, employs a sampling strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the insurance segment of the S&P Total Market Index.
Now, let’s begin to break down the Daily Price chart for the KIE ETF.
Below is a Daily Price chart with the 50-Day EMA and 100-Day EMA for the KIE ETF.
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 ETF’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 the KIE ETF
As the chart shows, on October 29th, 2022, the KIE 50-Day EMA, crossed above the 100-Day EMA.
This crossover indicated the buying pressure for the KIE ETF exceeded the selling pressure. For this kind of crossover to occur, an ETF 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 ETF is more likely to keep trading at new highs and should be purchased.
Our initial price target for the KIE ETF is 45.00 per share.
95.3% Profit Potential for KIE Option
Now, since KIE’s 50-Day EMA is trading above the 100-Day EMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a KIE 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 KIE 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 KIE option example, we used the 1% Rule to select the KIE 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 KIE in-the-money option strike price, the KIE ETF 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/ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if the KIE ETF is flat at 42.91 at option expiration, it will only result in a 6.9% loss for the KIE 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/ETFs.
The prices and returns represented below were calculated based on the current ETF and option pricing for KIE on 2/22/2023 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock/ETF continues to move up in price.
For this specific call option, the calculator analysis below reveals if the KIE ETF increases 5.0% at option expiration to 45.06 (circled), the call option would make 44.2% before commission.
If the KIE ETF increases 10.0% at option expiration to 47.20 (circled), the call option would make 95.3% before commission and outperform the ETF return more than 9 to 1*.
The leverage provided by call options allows you to maximize potential returns on bullish ETFs.
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
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*Trading incurs risk and some people lose money trading.
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