On Friday, we looked at a Daily Price Chart for MSCI, Inc., noting that the stock’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.
For today’s Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Six Flags Entertainment Corporation stock symbol: SIX.
Before breaking down SIX’s MACD chart let’s first review what products and services the company offers.
Six Flags Entertainment Corporation owns and operates regional theme and waterparks under the Six Flags name. Its parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets. The company also sells food, beverages, merchandise, and other products and services within its parks.
MACD Indicator confirms Price Momentum
The SIX daily price chart below shows that SIX is in a price uptrend as the 24/52 day MACD line (black line) is above the 18-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart.
MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock’s longer term 52-Day Exponential Moving Average (EMA) from its shorter term 24-Day EMA. This creates the MACD line.
MACD ‘Buy’ Signal
The 18-Day EMA line functions as a buy/sell ‘trigger’. When the 24/52 Day MACD line crosses above the 18-Day EMA line it indicates positive momentum and higher prices for the stock. When the 24/52 Day MACD lines crosses below the 18-Day EMA it indicates negative momentum and lower prices for the stock. MACD is more of a leading indicator than a moving average cross over which tends to lag price movement.
MACD Histogram shows Acceleration of Momentum
Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 24/52 Day MACD and the 18-Day EMA.
When a crossover initially occurs, the histogram’s bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock’s momentum. When the histogram’s bars begin to shrink this indicates a narrowing of the gap between the 24/52 Day MACD and the 18-Day EMA and a slowing of the stock’s momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon.
Buy SIX Stock
As long as the 24/52 Day MACD line remains above the 18-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks.
Since SIX’s bullish run is likely to continue, the stock should be purchased.
Our initial price target for SIX stock is 30.50 per share.
Profit if SIX Is Down 10%
Now, since SIX’s 24/52 Day MACD is trading above the 18-Day EMA and will likely rally from here, let’s use the Optioneering calculator to look at the potential returns for an SIX covered call trade. Covered calls are also known as buy writes.
The Buy Write Calculator will calculate the profit/loss potential for a covered call trade based on the price change of the underlying stock/ETF at option expiration in this example from a 10% increase to a 10% decrease in SIX stock at option expiration.
The goal of this example is to demonstrate the ‘built in’ profit potential for covered calls and the ability of covered calls to profit if the underlying stock is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike price used in the profit/loss calculation.
The prices and returns represented below were calculated based on the current stock and option pricing for SIX on 2/10/2023 before commissions.
Built in Profit Potential
For this covered call, the calculator analysis below reveals the cost or the breakeven price is $2,199.00 (circled). The maximum risk for a covered call is the cost of the covered call.
The analysis reveals that if SIX is flat at 27.94 or up at all at expiration the covered call will realize a $551.00 profit and a 25.1% return (circled).
If SIX decreases 5.0% at option expiration, the covered call will realize an $455.30 profit and a 20.7% return.
And if SIX decreases 10.0% at option expiration, the covered call will realize a $315.60 profit and a 14.4% return.
Due to option pricing characteristics, this covered call has a ‘built in’ 25.1% profit potential when the trade was identified*.
Covered call trades can result in a higher percentage of winning trades compared to a directional stock trade if you can profit when the underlying stock/ETF is up, down or flat.
A higher percentage of winning trades can give you the discipline needed to become a successful trader.
The 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.