Wednesday, October 6th, 2021
Happy Wonderful Wednesday!
Last week, the market had a huge dropped 4 days out of 5. And this week continued the downward slide. The Nasdaq has the highest % drop as tech stocks tumbled. We will continue to watch how the week plays out.
To review past equity candidates, scroll down.
For today’s Trade of the Day, we will be looking at Roku, Inc., symbol (ROKU). Before analyzing ROKU’s chart, let’s take a closer look at the stock and its services.
Roku, Inc., together with its subsidiaries, operates a TV streaming platform. The company operates in two segments, Platform and Player. In addition, the company offers streaming players, and audio products and accessories under the Roku brand name; and sells branded channel buttons on remote controls. It provides its products and services through retailers and distributors, as well as directly to customers through its website in the United States, Canada, the United Kingdom, France, the Republic of Ireland, Mexico, Brazil, and other Latin American countries.
Roku, Inc. was founded in 2002 and is headquartered in San Jose, California.
I looked through a lot of charts over the weekend. I zeroed in on ROKU on Monday because it looks ready to drop further. It is a widely traded stock with lots of volume.
On the ADX indicator below the chart, notice how the red -DI line is on top of the +DI line and the ADX. The red -DI line is heading up and the ADX line appears to be starting to turn up. These are all signals of building bearish strength with the thought that price may continue to drop.
For those who want more info on ADX, I give more details in the section below, or scroll down to the trade info.
Average Directional Index (ADX) Points to Direction and Strength
ADX is an easy indicator to interpret. The +DI line (green) is bullish and when it is on top, it suggests price is going to head up. When the -DI line (red) is on top, it suggests price is going to drop.
The black line is the strength line and when it heads up, it is telling you strength is moving into the DI line that is on top and in control. When the ADX line has been heading down, the DI line on top has been weakening and is ready for a change.
When the DI lines swap places and cross up and the ADX heads up, it suggests strength is moving into the new DI direction.
ADX signal = Profit Payout
Each candle on the chart represents price movement of a week. As the – DI heads up and moves further above the black line and both rise above the green line, it suggests there is bearish strength that could continue to grow, especially once the black line starts to turn up. If price continues to drop, the ADX line (black) will continue to turn to head up to imply that strength will continue to support the trade. As long as the ADX is heading up, it means it is supporting the bearish- down direction. The opposite is true if the +DI line heads up to cross the -DI line – this suggests bullish strength and a climb in price. If the ADX line heads up while the green +DI is on top, is it saying strength is building into the upward direction.
I am looking at its chart and possible trade on Monday, but the pattern looks as if it will continue and the -DI may continue heading up if price keeps dropping. You don’t want to consider entry if the current candle doesn’t stay below 297 or if the -DI line were to turn back down.
ROKU Potential Trade
Please note and remember that I am typing this on Monday, two days before you receive it and the information, I am sharing could change over those two days and is intended to share the opportunities that options offer us.
Roku (ROKU) last week was down, suggesting it may continue its downward bias. It appears to be ready to head lower and have the ADX turn up further, if this continues, the pattern should remain intact as price keeps dropping. Notice the -DI is heading up and is above the +DI line on the chart above. We want the -DI to stay above the +DI (red line above green) to consider a trade.
Price is likely to drop further and move below 297 entry. Its first target is 280 as the -DI (red line) stays above and the ADX (black line) turns up. Its current downtrend should remain intact, and price should continue to drop, perhaps even as low as 280. We will keep an eye on ROKU over the next couple weeks.
I am looking at charts on Monday, so prices are apt to change a little by Wednesday. Be sure the red -DI line continues to rise and goes further above the green +DI line and price stays below 297 before entry.
The short-term price target for ROKU is $280, and then perhaps lower.
To buy shares ROKU today, price would be approximately 297. It would be silly to buy shares if you expect price to drop. You’d wait until it hit a bottom and started to rise again.
This said, option trading offers the potential of a smaller initial investment and higher percentage gain even when price is expected to rise. Let’s take a look.
If you bought one PUT option contract covering 100 shares of ROKU’s stock with an Oct 22nd expiration date (Oct wk4) for the $280 strike and premium would be approximately $7.30 today or a total of $730 per contract. If price decreased the expected $17 to $280 target over the next few weeks, the premium might increase approximately $10 to $17.30 per share or $1,000 on your 100-share contract. This is a gain of $1,000 on your $730 investment or a 137% gain over a couple weeks.
Remember you can close an option trade anywhere along the line before expiration to take gains or stop a loss.
The example of making money when price drops rather than holding losing shares of stock. Big difference.
Options can offer a win, win, win trade opportunity. They often offer a smaller overall investment, covering more shares of stock and potentially offer greater profits.
If you are having any kind of trouble taking advantage of these trades, I don’t want you to miss out. I have put together programs that help traders just like you access the potential profits that options provide. I write like we are having a conversation, so the information is easy to understand and apply. Be sure to check out the programs shared in this email and we will make it easy for you to get your share.
I love to trade, and I love to teach. It is my thing.
Yours for a prosperous future,
PS-I have created this daily letter to help you see the great potential you can realize by trading options. Being able to recognize these set ups are a key first step in generating wealth with options. Once you are in a trade, there is a huge range of tools that can be used to manage the many possibilities that can present themselves. If you are interested in learning how to apply these tools and increase the potential of each trade, click here to learn more.
Review of Past Candidates:
Two weeks ago, we looked at AAPL with an October 8th expiration (Oct wk 2), a 137 strike and a premium of 1.47. This was a Put trade and price dropped as low as 141.47 on Tuesday before the newsletter went out. Premium went as high as 2.40 last week which was a nice gain. Price then rose on Friday to close the week at 144.16. Premium today is 1.27 after time decay and expiration coming closer.
Last week, we studied MCD and an Oct 15 expiration, a strike of 252.50 and a premium of 1.49. There wouldn’t have been a trade since the week was down 4 days out of 5. And, now the market as a whole is down on Monday again this week. I peeked at premium and it is at .49 with the decline and time decay. Luckily, dropping prices kept us out of the trade.