| Homebuilder on Sustained Buy Signal |
Dear Reader,
On Friday, we looked at a Daily Price Chart of Qualcomm Inc. noting that the stock's OBV line is sloping up confirming the bullish trend.
For today's Trade of the Day e-letter we will be looking at a monthly chart for DR Horton Inc. stock symbol: DHI.
Before breaking down DHI's monthly chart let's first review what products and services the company offers.
D.R. Horton, Inc. operates as a homebuilding company in East, Midwest, Southeast, South Central, Southwest, and West regions in the United States. It engages in the acquisition and development of land; and construction and sale of homes in 20 states and 51 markets in the United States under the names of D.R. Horton, America's Builder, Express Homes, Emerald Homes, and Freedom Homes.
Now, let's begin to break down the monthly chart for DHI stock.
Below is a 10-Month Simple Moving Average chart for DR Horton Inc. |
As the chart shows, in May, the DHI 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for DHI 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 in the coming days and weeks.
We'll be keeping our eye on this stock as it continues to trend upward, so we'll know the moment the market conditions shift and the stock begins to come back down.
Our initial price target for DHI is 88.25 per share. |
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| | | | | 92.4% Profit Potential for DHI Option
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Now, since DHI'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 DHI 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 DHI 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 DHI option example, we used the 1% Rule to select the DHI 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.
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Trade with Higher Accuracy
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When you use the 1% Rule to select a DHI in-the-money option strike price, DHI 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 DHI stock is flat at 77.89 at option expiration, it will only result in a 3.2% loss for the DHI 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 DHI on 10/2/2020 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 DHI stock increases 5.0% at option expiration to 81.78 (circled), the call option would make 44.6% before commission.
If DHI stock increases 10.0% at option expiration to 85.68 (circled), the call option would make 92.4% before commission and outperform the stock return more than 9 to 1.
And if DHI stock increases to our initial price target of 88.25 at option expiration the call option would make 123.9% before commission.
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.
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Chuck's Inner Circle Trading Service |
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| You can start receiving hand-picked trades from Chuck today!
Chuck is offering special pricing for his Inner Circle Trading Service for Trade of the Day subscribers.
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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