Momentum Builds Behind CL’s Rally

Dear Reader,

Yesterday, we looked at a Daily Price Chart of American International Group, Inc., noting that AIG’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 Colgate-Palmolive Co. (CL). Colgate-Palmolive is a global leader in the oral care hygiene market. It produces and distributions household, healthcare and personal care products. Company’s business strategy closely defines efforts to increase its leadership in key product categories through innovation in core businesses, tracking adjacent categories growth and expansion into new markets and channels.

MACD Indicator confirms Price Momentum

The CL daily price chart below shows that CL 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 crossover which tends to lag price movement.

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Buy CL 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 CL’s bullish run is likely to continue, the stock should be purchased.

Our initial price target for CL stock is 95.51 per share.

88.6% Profit Potential for CL Option

Now, since CL’s 24/52 Day MACD is trading above the 18-Day EMA this means the stock’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a CL 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 CL 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 CL option example, we used the 1% Rule to select the CL 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 CL in-the-money option strike price, CL stock 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 closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if CL stock is flat at 92.91 at option expiration, it will only result in a 7.7% loss for the CL 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.

The prices and returns represented below were calculated based on the current stock and option pricing for CL on 5/2/2024 before commissions.

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

For this specific call option, the calculator analysis below reveals if CL stock increases 5.0% at option expiration to 97.56 (circled), the call option would make 40.5% before commission.

If CL stock increases 10.0% at option expiration to 102.20 (circled), the call option would make 88.6% before commission and outperform the stock return nearly 9 to 1*.

The leverage provided by call options allows you to maximize potential returns on bullish stocks.

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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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.

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Wishing You the Best in Investing Success,