June 1st, 2022
Yesterday, we looked at a Monthly Price Chart of APA Corporation. noting the stock’s 1-Month Price is trading above the 10-Month SMA signaling a ’Buy’.
For today’s Trade of the Day we will be looking at a Keltner Channel chart for Uber Technologies, Inc. stock symbol: UBER.
Before breaking down UBER’s daily Keltner Channel chart let’s first review which products and services are offered by the company.
Uber Technologies, Inc. develops and operates proprietary technology applications in the United States, Canada, Latin America, Europe, the Middle East, Africa, and the Asia Pacific. It connects consumers with independent providers of ride services for ridesharing services; and connects riders and other consumers with restaurants, grocers, and other stores with delivery service providers for meal preparation, grocery, and other delivery services.
Now, let’s begin to break down the Keltner Channel chart for UBER. Below is a Daily Price Chart and the three Keltner Channels for UBER stock.
Sell UBER 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 price rebound.
Even stocks that are in the strongest bear trends do not advance in a straight line. There are always price rebounds along the way. When a stock becomes oversold, it’s price will typically rebound higher soon after as the inevitable ’buying the dip’ occurs.
The UBER daily price chart shows that the stock is in a strong price downtrend and has become oversold several times. You can see this as UBER has traded below the Lower Keltner Channel on multiple occasions recently.
But, in every scenario when UBER became oversold, the stock soon experienced a price rebound.
Finding bearish trade opportunities when a stock experiences a price 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 entry opportunity for bearish trades as the stock is likely to continue its decline from there.
Our initial price target for UBER stock is 20.80 per share.
72.4% Profit Potential for UBER Option
Now, since UBER is trading in the Keltner Channel ’Sell Zone’ this offers us a prime bearish trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for an UBER put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat UBER price to a 12.5% decrease.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following UBER option example, we used the 1% Rule to select the UBER 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 UBER in-the-money option strike price, UBER only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put 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 UBER stock is flat at 23.20 at option expiration, it will only result in a 5.7% loss for the UBER option compared to a 100% loss for an at-the-money or out-of-the-money put 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 put 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 UBER on 5/31/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.
For this specific put option, the calculator analysis below reveals if UBER decreases 5.0% at option expiration to 22.04 (circled), the put option would make 33.3% before commission.
If UBER decreases 10.0% at option expiration to 20.88 (circled), the put option would make 72.4% before commission and greatly outperform the stock.
The leverage provided by put options allows you to maximize potential returns on bearish stocks.
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.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
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