Yesterday, we looked at a Daily Keltner Channel chart of Biogen Inc., noting the stock had pulled back below the upper Keltner Channel into the “Buy Zone”.
For today’s Trade of the Day we will be looking at a Daily Price chart for the iShares MSCI Japan ETF, symbol: EWJ.
Before breaking down EWJ’s daily price chart let’s first review the investment objective of the ETF.
The EWJ ETF will invest at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index. The underlying index is designed to measure the performance of the large- and mid-capitalization segments of the Japanese equity market.
Now, let’s begin to break down the Daily Price chart for EWJ. Below is a Daily Price Chart with the price line displayed by an OHLC bar.
Buy the EWJ ETF
The Daily Price chart above shows that EWJ shares have been hitting new 52-Week Highs regularly since early May.
Simply put, an ETF does not just continually hit a series of new 52-Week Highs unless it is in a very strong bullish trend.
The Hughes Optioneering team looks for ETFs that are making a series of 52-Week Highs as this is a good indicator that the ETF is in a powerful uptrend.
You see, after an ETF makes a series of two or more 52-Week Highs, the ETF typically continues its price uptrend and should be purchased.
Our initial price target for EWJ is 63.50 per share.
94.1% Profit Potential for EWJ Option
Now, since EWJ is currently making a series of new 52-Week Highs 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 EWJ 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 EWJ 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 EWJ option example, we used the 1% Rule to select the EWJ 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 EWJ in-the-money option strike price, EWJ 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 EWJ is flat at 60.85 at option expiration, it will only result in a 4.9% loss for the EWJ 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 EWJ on 5/17/2023 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 the EWJ ETF increases 5.0% at option expiration to 63.89 (circled), the call option would make 44.6% before commission.
If the EWJ ETF increases 10.0% at option expiration to 66.94 (circled), the call option would make 94.1% 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.