On Friday, we looked at a Daily Price Chart of ShockWave Medical Inc., noting that the stock’s 24/52 Day MACD is trading below the 18-Day EMA.
For today’s Trade of the Day e-letter we will be looking at a monthly chart for Caterpillar, Inc. stock symbol: CAT.
Before breaking down CAT’s monthly chart let’s first review what products and services the company offers.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Its Construction Industries segment offers asphalt pavers, compactors, cold planers, feller bunchers, harvesters, motorgraders, pipelayers, road reclaimers, skidders, telehandlers, and utility vehicles; backhoe, knuckleboom, compact track, multi-terrain, skid steer, and track-type loaders; forestry and wheel excavators; and site prep and track-type tractors.
Now, let’s begin to break down the monthly chart for CAT stock.
Below is a 10-Month Simple Moving Average chart for Caterpillar, Inc.
Buy CAT Stock
As the chart shows, in October, the CAT 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for CAT stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish uptrend.
Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!
As long as the 1-Month price remains above the 10-Month SMA, the stock is more likely to keep trading at new highs and should be purchased.
Our initial price target for CAT is 265.00 per share.
Profit if CAT is Up, Down or Flat
Now, since CAT’s Monthly Price is currently trading above the 10-Month SMA and will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for a CAT call option spread.
The Call Option Spread Calculator will 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 CAT 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 CAT on 1/17/2023 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $625 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if CAT stock is flat or up at all at expiration the spread will realize a 60.0% return (circled).
And if CAT stock decreases 7.5% at option expiration, the option spread would make a 26.9% return (circled).
Due to option pricing characteristics, this option spread has a ‘built in’ 60.0% profit potential when the trade was identified*.
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 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.
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 Netflix for $350. If you were to purchase 100 shares of Netflix at current prices it would cost about $32,000. With the stock purchase you are risking $32,000 but with a Netflix option spread that costs $350 your maximum risk is $350 so your dollar risk is lower with option spreads compared to stock purchases.
Get Trade Insights Directly From Chuck
You can start getting market insights directly from 10-Time Trading Champion Chuck Hughes.
See what he’s trading and when with his exclusive Inner Circle Trading Service where he will send you his hand-picked stock and option trades.
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join or CLICK HERE to schedule a call!
Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at firstname.lastname@example.org
*Trading incurs risk and some people lose money trading.