May 27th, 2022
Yesterday, we looked at a Daily Price Chart of ConocoPhillips noting the stock’s OBV line is sloping up, validating COP’s recent bullish trend.
For today’s Trade of the Day we will be looking at a Keltner Channel chart for Block, Inc. stock symbol: SQ.
Before breaking down SQ’s daily Keltner Channel chart let’s first review which products and services are offered by the company.
Block, Inc., together with its subsidiaries, creates tools that enables sellers to accept card payments and provides reporting and analytics, and next-day settlement. It provides hardware products, including Magstripe reader, which enables swiped transactions of magnetic stripe cards; Contactless and chip reader that accepts Europay, MasterCard, and Visa (EMV) chip cards and Near Field Communication payments; Square Stand, which enables an iPad to be used as a payment terminal or full point of sale solution; Square Register that combines its hardware, point-of-sale software, and payments technology
Now, let’s begin to break down the Keltner Channel chart for SQ. Below is a Daily Price Chart and the three Keltner Channels for SQ stock.
Sell SQ 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 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 SQ daily price chart shows that the stock is in a strong price downtrend and has become oversold several times. You can see this as SQ has traded below the lower Keltner Channel on multiple occasions recently.
But, in every scenario when SQ became oversold, the stock soon experienced a quick rebound.
Finding opportunities when a stock experiences a rebound is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point for our bearish positions.
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 bearish trade entry opportunity as the stock is likely to continue its decline.
Our initial price target for SQ stock is 77.00 per share.
Profit if SQ is Down, Up, or Flat
Now, since SQ stock is trading in the Keltner Channel ‘Sell Zone’, this provides us a prime bearish trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for an SQ 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 SQ 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 down, up, 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 SQ on 5/26/2022 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $322 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if SQ stock is flat or down at all at expiration the spread will realize a 55.3% return (circled).
And if SQ stock increases 10.0% at option expiration, the option spread would make a 55.3% return (circled).
Due to option pricing characteristics, this option spread has a ‘built in’ 55.3% 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, Netflix or Apple 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 $215,000. With the stock purchase you are risking $215,000 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.
Get Chuck’s Trades Sent to You!
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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.
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code “Optioneering VIP” to receive special pricing!
You can also CLICK HERE to schedule a call!
Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at email@example.com
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