| FSLY Flashes Buy Signal to Investors |
Dear Reader,
Yesterday, we looked at a Daily Price Chart of Chipotle Mexican Grill, Inc., noting that the stock had been making a series of higher highs and higher lows.
For today's Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Fastly, Inc. stock symbol: FSLY.
Before breaking down FSLY's MACD chart let's first review what products and services the company offers.
Fastly, Inc. operates an edge cloud platform for processing, serving, and securing its customer's applications. The edge cloud is a category of Infrastructure as a Service that enables developers to build, secure, and deliver digital experiences at the edge of the Internet. It is a programmable platform designed for Web and application delivery. As of December 31, 2019, the company's edge network spans 68 points-of-presence worldwide.
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MACD Indicator Confirms Price Momentum
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The FSLY daily price chart below shows that FSLY is in a price uptrend as the 12/26 day MACD line (black line) is above the 9-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart.
MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock's longer term 26-Day Exponential Moving Average (EMA) from its shorter term 12-Day EMA. This creates the MACD line. |
The 9-Day EMA line functions as a buy/sell 'trigger'. When the 12/26 Day MACD line crosses above the 9-Day EMA line it indicates positive momentum and higher prices for the stock. When the 12/26 Day MACD lines crosses below the 9-Day EMA it indicates negative momentum and lower prices for the stock.
MACD is more of a leading indicator than a moving average cross over which tends to lag price movement. |
MACD Histogram Shows Acceleration of Momentum
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Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 12/26 Day MACD and the 9-Day EMA.
When a crossover initially occurs, the histogram's bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock's momentum. When the histogram's bars begin to shrink this indicates a narrowing of the gap between the 12/26 Day MACD and the 9-Day EMA and a slowing of the stock's momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon. |
As long as the 12/26 Day MACD line remains above the 9-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks.
Our price target for FSLY stock is 49.00 per share.
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| | | | Profit if FSLY Is Down 10%
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Now, since FSLY's 12/26 MACD line is currently above the 9-Day EMA and the stock will likely rally from here, let's use the Optioneering calculator to look at the potential returns for a FSLY 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% increase to a 10% decrease in FSLY stock 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 stock 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 stock and option pricing for FSLY on 5/21/2020 before commissions.
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31.9% Built in Profit Potential
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For this covered call, the calculator analysis below reveals the cost or the breakeven price is $3,260 (circled). The maximum risk for a covered call is the cost of the covered call.
The analysis reveals that if FSLY is flat at 44.25 or up at all at expiration the covered call will realize a $1,040 profit and a 31.9% return (circled).
If FSLY decreases 5% at option expiration, the covered call will realize a $943.75 profit and a 28.9% return.
And if FSLY decreases 10% at option expiration, the covered call will realize a $722.50 profit and a 22.2% return.
Due to option pricing characteristics, this covered call has a 'built in' 31.9% profit potential when the trade was initiated.
Covered call trades can result in a higher percentage of winning trades compared to a directional stock 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.
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Chuck is offering special pricing for his Weekly Option Alert Trading Service for Trade of the Day subscribers.
You can start receiving hand-picked trades from Chuck today!
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! |
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Wishing You the Best in Investing Success,
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| | Chuck Hughes Editor, Trade of The Day
Have any questions? Email us at dailytrade@chuckstod.com |
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