On Friday, we looked at a Daily Price Chart of Reinsurance Group of America, noting that the stock’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.
For today’s Trade of the Day e-letter we will be looking at a monthly chart for Dick’s Sporting Goods Inc. stock symbol: DKS.
Before breaking down DKS’s monthly chart let’s first review what products and services the company offers.
DICK’S Sporting Goods, Inc., together with its subsidiaries, operates as a sporting goods retailer primarily in the eastern United States. The company provides hardlines, including sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear products; apparel; and footwear and accessories. It also owns and operates Sporting Goods, Golf Galaxy, Field & Stream, Public Lands, Going Going Gone!
Now, let’s begin to break down the monthly chart for DKS stock.
Below is a 10-Month Simple Moving Average chart for Dick’s Sporting Goods Inc.
Buy DKS Stock
As the chart shows, in August 2022, the DKS 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for DKS 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 DKS is 142.50 per share.
91.0% Profit Potential for DKS Option
Now, since DKS’s 1-Month Price is trading above the 10-Month SMA this means the stock’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a DKS call option purchase.
The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat DKS price to a 12.5% increase.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following DKS option example, we used the 1% Rule to select the DKS 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 a DKS in-the-money option strike price, DKS stock only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call 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 DKS stock is flat at 135.17 at option expiration, it will only result in a 9.5% loss for the DKS option compared to a 100% loss for an at-the-money or out-of-the-money call 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 call 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 DKS on 2/6/2023 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if DKS stock increases 5.0% at option expiration to 141.93 (circled), the call option would make 40.7% before commission.
If DKS stock increases 10.0% at option expiration to 148.69 (circled), the call option would make 91.0% before commission and outperform the stock return more than 9 to 1*.
The leverage provided by call options allows you to maximize potential returns on bullish stocks.
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.
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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
*Trading incurs risk and some people lose money trading.