Railroad Stock in Mega Trend

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Chuck's Trade of the Day

May 17th, 2021

Railroad Stock in Mega Trend

Dear Reader,

On Friday, we looked at a Daily Price Chart of American International Group, Inc., noting that the stock was trading in the Keltner Channel ‘Buy Zone’.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for Canadian Pacific Railway stock symbol: CP.

Before breaking down CP’s monthly chart let’s first review what products and services the company offers.

Canadian Pacific Railway Limited, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. The company transports bulk commodities, including grain, coal, potash, fertilizers, and sulphur; and merchandise freight, such as energy, chemicals and plastics, metals, minerals and consumer, automotive, and forest products. It also transports intermodal traffic comprising retail goods in overseas containers.

Now, let’s begin to break down the monthly chart for CP stock.

Below is a 10-Month Simple Moving Average chart for Canadian Pacific Railway.

Buy CP Stock

As the chart shows, in May 2020, the CP 1-Month Price, crossed above the 10-Month simple moving average (SMA).

This crossover indicated the buying pressure for CP 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 CP stock is 85.67 per share.

100.0% Profit Potential for CP Option

Now, since CP’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 CP 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 CP 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 CP option example, we used the 1% Rule to select the CP 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 CP in-the-money option strike price, CP 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 CP stock is flat at 79.91 at option expiration, it will only result in a 0.5% loss for the CP 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 will 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 CP on 5/14/2021 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 CP stock increases 5.0% at option expiration to 83.91 (circled), the call option would make 49.8% before commission.

If CP stock increases 10.0% at option expiration to 87.90 (circled), the call option would make 100.0% before commission and outperform the stock return 10 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 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.

Special Offer for TOD Members!

Do you want to start receiving hand-picked trades from 10-Time Trading Champion, Chuck Hughes?

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!

 

Wishing You the Best in Investing Success,

Chuck Huges Signature

Chuck Hughes

Editor, Trade of the Day

Have any questions? Email us at dailytrade@chuckstod.com

 
 

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