A Stalled-Out Stock Ready To Rebound For 100% Returns

| November 30, 2016 | 0 Comments

portfolio hedgingTilt the scales in your favor and use options to profit from this range-bound stock with a high probability of rallying higher. Only a small move higher will hand investors upwards of 100% returns. 

Stocks here in the states have surged to new ALL TIME FOREVER highs after an epic relief rally with election uncertainty now over. The stuck sideways S&P surged in the last few weeks with 2016 performance at plus 8%.

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The five-year S&P gain totals 90% compared to the once global market leader. The EWG iShares German ETF has slid in the past two years, down 9% in the last 52 weeks alone.

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Solidly off the 2014 record, EWG has retraced to the $25 five-year midpoint pivot of the $18 to $32 trading range. The German drop from the top totals a 20% fall.

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Action has remained bound between $23 and $25 over the last year of trade. A rally to the channel top targets a $4 rally with the technical breakout target at $31. This is an opportunity to use the power of options for a capital preserving stock substitution strategy.

The January 2018 option has one year and two months for Bullish development.

 An In-The-Money option gives you the right to be long from a lower strike price and it costs much less than the ETF share itself.

The Options Way: Unlimited Upside Potential with Limited Risk. 

A iShares Germany Index Fund long call option can provide the staying power in a potentially larger trend extension. More importantly, the maximum risk is the premium paid.

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares, that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for a gain or loss.

There are two rules options traders need to follow to be successful.

Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.

There is no need to ONLY make money on the all but infrequent long shot price explosions.

Good Options can profit from just modest directional moves.

Any trade has a fifty/fifty chance of success. Buying In The Money options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.

Buying better options are more expensive, but they are worth it. The chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.

With EWG trading at $24.75, for example, an In The Money $22 strike option currently has $2.75 in real or intrinsic value. The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.

Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right, but only after the option has expired premature to the market move.

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Trade Setup: I recommend the EWG January 2018 $22 Call at $4.00 or less.

A close in the stock below $23 on a weekly basis would trigger an exit. Notice the $22 strike has the right to be long from a discounted level last seen in 2012.

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta of this $22 strike is 75%.

The January 2018 option has nearly one year and two months for bullish development, with the right to buy below the lowest level in the last year.

The maximum loss is limited to the $400 or less paid per option contract with an exit stop loss at half the option premium to reduce dollar exposure. The upside, on the other hand, is unlimited.

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The EWG option trade break even is $26.00 at expiration ($22 strike plus $4.00 or less option premium). That is just over one dollar above the ETF current price.

A push above the $27 channel top resistance targets $31 which would put the option value at $9.00 to more than double the original investment.

If you’re still not ready to take the plunge into buying options but still desire the high returns that they offer, my colleague Bret Jensen might have a complimentary solution for you.

He just released a report titled “5 Stocks to Double Your Money Overnight,” and in this report, he goes over, in detail, his five highest-conviction trades for 2017. After closing out a 190% gain in his Growth Stock Advisor newsletter in just five months, you can bet that he’s the real deal.

There’s still time to enter these trades before they rocket higher, so access this report now with the link below.

Click here to access my “5 Stocks to Double Your Money Overnight” 

 

Note: The author of this article is Alan Knuckman.

 

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Category: Options Trading Strategy

About the Author ()

Alan Knuckman is a contributor to investorsalley.com.