Dear Reader,

Chuck Hughes here. I just found a great trade set up for LRCX that I wanted to highlight for you. This example will show you how I’m able to profit when a stock increases in price, stays flat, or even drops -7.5%. I know, it sounds too good to be true. But let me walk you through it.

LRCX is the stock symbol for Lam Research Corporation which designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers ALTUS systems to deposit conformal films for tungsten metallization applications; SABRE electrochemical deposition products for copper interconnect transition that offers copper damascene manufacturing; SOLA ultraviolet thermal processing products for film treatments; and VECTOR plasma-enhanced CVD ALD products. 

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Now, let’s begin to break down the Daily Price chart for LRCX stock. Below is a Daily Price chart with the 50-Day EMA and 100-Day EMA for LRCX.

What Does the 50-Day EMA and 100-Day EMA Tell Us?

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 stock’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.

Entry Point for LRCX

As the chart shows, on January 13th, 2023, the LRCX 50-Day EMA, crossed above the 100-Day EMA. This tells us that the buying pressure for LRCX stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish trend.

Looking at the chart today, 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 stock is more likely to keep trading at new highs.

How I Would Trade LRCX

Now, since LRCX’s 50-Day EMA is trading above the 100-Day EMA and will likely rally from here, I’d look to enter a position for LRCX. Let’s use my Hughes Optioneering calculator to look at the potential returns for a LRCX call option spread.

The Call Option Spread Calculator is a tool I had made to calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in LRCX stock at option expiration.

The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads 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 prices used in the profit/loss calculation.

The prices and returns represented below were calculated based on the current stock and option pricing for LRCX on 1/25/2024 before commissions.

A 70.9% Return Without LRCX Moving?

Looking at the calculator we can see that the cost of the spread is $1,170 (circled). The maximum risk for an option spread is the cost of the spread.

If LRCX stock is flat, up at all, or down 7.5% at expiration the spread will realize a 70.9% return (circled). 

At the time that I looked at this LRCX trade it had a ‘built in’ 70.9% profit potential*.

I love option spread trades because they can result in a higher percentage of winning trades compared to a directional option trade. That’s because option spreads can profit when the underlying stock/ETF is up, down or flat.

Me and my team are here to help you identify profit opportunities just like this one. Keep an eye out for our next find!

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.