June 30th, 2022
Profit from Disney’s Decline?
Dear Reader,
Yesterday, we looked at a Daily Price Chart of Snap Inc., noting that the stock's 50-Day EMA is trading below the 100-Day EMA signaling a 'Sell'.
For today's Trade of the Day e-letter we will be looking at a monthly chart for Walt Disney Co. stock symbol: DIS.
Before breaking down DIS's monthly chart let's first review what products and services the company offers.
The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences and Products.
Now, let's begin to break down the monthly chart for DIS stock.
Below is a 10-Month Simple Moving Average chart for Walt Disney Co.
Sell DIS Stock
As the chart shows, in September, the DIS 1-Month Price, crossed below the 10-Month simple moving average (SMA).
This crossover indicated the selling pressure for DIS stock exceeded the buying pressure. For this kind of crossover to occur, a stock has to be in a strong bearish downtrend.
Now, as you can see, the 1-Month Price is still below the 10-Month SMA. That means the bearish trend is still in play!
As long as the 1-Month price remains below the 10-Month SMA, the stock is more likely to keep trading at new lows and bearish positions should be initiated.
Our initial price target for DIS is 86.00 per share.
104.9% Profit Potential for DIS Option
Now, since DIS's 1-Month Price is trading below the 10-Month SMA, the stock will likely continue its trend downward. Let's use the Hughes Optioneering calculator to look at the potential returns for a DIS put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat DIS price to a 12.5% decrease.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following DIS option example, we used the 1% Rule to select the DIS 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 DIS in-the-money option strike price, DIS stock only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put 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 DIS stock is flat at 95.75 at option expiration, it will only result in a 5.2% loss for the DIS option compared to a 100% loss for an at-the-money or out-of-the-money put 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 put 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 DIS on 6/29/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.
For this specific put option, the calculator analysis below reveals if DIS stock decreases 5.0% at option expiration to 90.96 (circled), the put option would make 49.9% before commission.
If DIS stock decreases 10.0% at option expiration to 86.18 (circled), the put option would make 104.9% before commission and greatly outperform the stock return.
The leverage provided by put options allows you to maximize potential returns on bearish 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.
Afraid of Market Volatility Rocking Your IRA?
Chuck Hughes isn't afraid of market volatility, he takes advantage of it. Chuck is used to turbulence.
His years as a pilot gave him the ability to weather even the worst storms.
He has tested and proven strategies that thrive during turbulent market conditions.
You could gain access to these strategies and start receiving hand picked trades from Chuck today!
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join or you can CLICK HERE to schedule a call!
Wishing You the Best in Investing Success,
Chuck Hughes
Editor, Trade of the Day
Have any questions? Email us at dailytrade@chuckstod.com
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