Dear Reader,

Yesterday, we looked at a Daily Price Chart of Constellation Energy Corp., noting that CEG stock has been making a series of new 52-Week Highs recently.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for the iShares U.S. Aerospace and Defense ETF symbol: ITA.

Before breaking down ITA’s monthly chart let’s first review the investment objective of the ETF.

The ITA ETF seeks to track the investment results of an index composed of U.S. equities in the aerospace and defense sector. The Fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Aerospace and Defense Index.

Now, let’s begin to break down the monthly chart for the ITA ETF.

Below is a 10-Month Simple Moving Average chart for ITA.

Buy the ITA ETF

As the chart shows, in November, the ITA 1-Month Price, crossed above the 10-Month simple moving average (SMA).

This crossover indicated the buying pressure for ITA exceeded the selling pressure. For this kind of crossover to occur, an ETF 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 ETF is more likely to keep trading at new highs and should be purchased.

Our initial price target for ITA is 137.30 per share.

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130.9% Profit Potential for ITA Option

Now, since ITA’s 1-Month Price is trading above the 10-Month SMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an ITA 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 ITA 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 ITA option example, we used the 1% Rule to select the ITA 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 ITA in-the-money option strike price, ITA 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 ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if the ITA ETF is flat at 134.31 at option expiration, it will only result in a 5.5% loss for the ITA 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 ETFs.

The prices and returns represented below were calculated based on the current ETF and option pricing for ITA on 5/13/2024 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.

For this specific call option, the calculator analysis below reveals if ITA increases 5.0% at option expiration to 141.03 (circled), the call option would make 62.7% before commission. 

If ITA increases 10.0% at option expiration to 147.74 (circled), the call option would make 130.9% before commissions and outperform the ETF return more than 13 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.

Check out Chuck’s PRO Trading Service!

I don’t want you to miss a single opportunity to potentially reach your goals. That’s why I want to share this video I made about my PRO Trading Service. 

I want you to follow in my footsteps for the opportunity to succeed beyond your wildest dreams, so please call my office at (737) 292-4425 and get started today!

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

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*Trading incurs risk and some people lose money trading.