'Buy Zone' Alert for Semiconductor ETF

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Chuck's Trade of the Day

December 2nd, 2021

‘Buy Zone’ Alert for Semiconductor ETF

Dear Reader,

Yesterday, we looked at a Monthly Price Chart of Costco Wholesale Corporation noting the stock’s 1-Month Price is trading above the 10-Month SMA.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for the Direxion Daily Semiconductor Bull 3X ETF, symbol: SOXL.

Before breaking down SOXL’s daily Keltner Channel chart let’s first review the investment objective of the ETF.

The SOXL ETF seeks daily investment results, before fees and expenses, of 300% of the daily performance of the PHLX Semiconductor Sector Index. The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, securities of the index, and ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or to ETFs that track the index.

Now, let’s begin to break down the Keltner Channel chart for SOXL. Below is a Daily Price Chart and the three Keltner Channels for the SOXL ETF.

Buy the SOXL ETF

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether an ETF is overbought or oversold. If an ETF’s daily share price is trading above the upper Keltner Channel, this signals that the ETF is temporarily overbought and subject to a retracement.

Even ETFs that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When an ETF becomes overbought, it’s price will typically decline soon after as the inevitable profit taking occurs.

The SOXL daily price chart shows that the ETF is in a strong price uptrend and has become overbought several times. You can see this as SOXL has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when SOXL became overbought, the ETF soon experienced a pullback.

Finding opportunities when an ETF experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when an ETF is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the ETF is likely to rally.

Our initial price target for SOXL is 67.80 per share.

Profit if SOXL Is Down 10%

Now, since SOXL is currently in the Keltner Channel “Buy Zone” and will likely rally from here, let’s use the Optioneering calculator to look at the potential returns for a SOXL covered call trade. Covered calls are also known as buy writes.

The Buy Write Calculator will calculate the profit/loss potential for a covered call trade based on the price change of the underlying stock/ETF at option expiration in this example from a 10.0% increase to a 10.0% decrease in SOXL at option expiration.

The goal of this example is to demonstrate the ‘built in’ profit potential for covered calls and the ability of covered calls to profit if the underlying ETF is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike price used in the profit/loss calculation.

The prices and returns represented below were calculated based on the current ETF and option pricing for SOXL on 12/1/2021 before commissions.

Built in Profit Potential

For this covered call, the calculator analysis below reveals the cost or the breakeven price is $4,711 (circled). The maximum risk for a covered call is the cost of the covered call.

The analysis reveals that if SOXL is flat at 63.16 or up at all at expiration the covered call will realize a $1,589.00 profit and a 33.7% return (circled).

If SOXL decreases 5.0% at option expiration, the covered call will realize a $1,289.20 profit and a 27.4% return.

And if SOXL decreases 10.0% at option expiration, the covered call will realize a $973.40 profit and a 20.7% return.

Due to option pricing characteristics, this covered call has a ‘built in’ 33.7% profit potential when the trade was initiated.

Covered call trades can result in a higher percentage of winning trades compared to a directional ETF 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 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.

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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

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