May 5th, 2022
Yesterday, we looked at a Daily Price Chart of Coterra Energy Inc. noting the stock’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.
For today’s Trade of the Day we will be looking at a Keltner Channel chart for Twilio Inc. stock symbol: TWLO.
Before breaking down TWLO’s daily Keltner Channel chart let’s first review which products and services are offered by the company.
Twilio Inc., together with its subsidiaries, provides a cloud communications platform that enables developers to build, scale, and operate customer engagement within software applications in the United States and internationally. Its customer engagement platform provides a set of application programming interfaces that handle the higher-level communication logic needed for nearly every type of customer engagement, as well as enable developers to embed voice, messaging, video, and email capabilities into their applications.
Now, let’s begin to break down the Keltner Channel chart for TWLO. Below is a Daily Price Chart and the three Keltner Channels for TWLO stock.
Sell TWLO Stock
The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether a stock is overbought or oversold. If a stock’s daily stock price is trading below the lower Keltner Channel, this signals that the stock is temporarily oversold and subject to a quick rebound.
Even stocks that are in the strongest bearish trends do not decline in a straight line. There are always price rebound along the way. When a stock becomes oversold, it’s price will typically increase soon after as the inevitable buying the dip occurs.
The TWLO daily price chart shows that the stock is in a strong price downtrend and has become oversold several times. You can see this as TWLO has traded below the Lower Keltner Channel on multiple occasions recently.
But, in every scenario when TWLO became oversold, the stock soon experienced a bounce back.
Finding opportunities when a bearish stock experiences a rebound is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.
The Keltner Channel “Sell Zone” occurs when a stock is trading above the lower Keltner Channel. Once the daily price is trading above the lower channel, it provides a lower-risk buying opportunity for a bearish trade as the stock is likely to continue its downward trend.
Our initial price target for TWLO stock is 102.60 per share.
Profit if TWLO is Down, Up or Flat
Now, since TWLO price has rebounded above the lower Keltner Channel, this provides us a prime bearish trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for a TWLO put option spread.
The Put Option Spread Calculator will calculate the profit/loss potential for a put option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 10.0% decrease to a 10.0% increase in TWLO 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 TWLO on 5/4/2022 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $660 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if TWLO stock is flat or down at all at expiration the spread will realize a 51.5% return (circled).
And if TWLO stock increases 10.0% at option expiration, the option spread would make a 51.5% return (circled).
Due to option pricing characteristics, this put option spread has a ‘built in’ 51.5% profit potential when the trade was initiated.
Option spread trades can result in a higher percentage of winning trades compared to a directional option 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 Hughes Optioneering Team is here to help you identify winning trades 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.
Trade High Priced Stocks for $350 With Less Risk
One of the big advantages to trading option spreads is that spreads allow you to trade high price stocks like Amazon, Google, or Netflix for as little as $350. With an option spread you can control 100 shares of Google for $350. If you were to purchase 100 shares of Google at current prices it would cost about $244,000. With the stock purchase you are risking $244,000 but with a Google option spread that costs $350 your maximum risk is $350 so your dollar risk is lower with option spreads compared to stock purchases.
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As a Trade of the Day subscriber, Chuck is offering you a special discount on his Weekly Option Alert Trading Service.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at firstname.lastname@example.org
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