On Friday, we looked at a Daily Price Chart of the Select Sector SPDR Fund ETF (XLF), noting that the XLF’s OBV line is sloping down, validating the recent trend, states Chuck Hughes of TradeWinsDaily.
For today’s Trade of the Day e-letter we will be looking at a monthly chart for Equity Residential Property Trust (EQR).
Before breaking down EQR’s monthly chart let’s first review what products and services the company offers. Equity Residential is committed to creating communities where people thrive. The Company, a member of the S&P 500 (SPX), is focused on the acquisition, development, and management of residential properties located in and around dynamic cities that attract high-quality long-term renters.
Now, let’s begin to break down the monthly chart for EQR stock. Below is a Ten-Month Simple Moving Average chart for Equity Residential Property Trust.
Sell EQR Stock
As the chart shows, in April, the EQR one-month price, crossed below the ten-month simple moving average (SMA). This crossover indicated the selling pressure for EQR 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 one-month price is still below the ten-month SMA. That means the bearish trend is still in play! As long as the one-month price remains below the ten-month SMA, the stock is more likely to keep trading at new lows and bearish positions should be initiated. Our initial price target for EQR is 63.50 per share.
114.3% Profit Potential for EQR Option
Now, since EQR’s one-month price is trading below the ten-month SMA this means the stock’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an EQR 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 EQR 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 EQR option example, we used the 1% Rule to select the EQR 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 an EQR in-the-money option strike price, EQR stock only has to decrease 1% for the option to break even 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 options trade! In this example, if EQR stock is flat at 67.22 at option expiration, it will only result in a 5.7% loss for the EQR 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 EQR on 9/30/2022 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 decline in price.
For this specific put option, the calculator analysis below reveals if EQR stock decreases 5.0% at option expiration to 63.86 (circled), the put option would make 54.3% before commission. If EQR stock decreases 10.0% at option expiration to 60.50 (circled), the put option would make 114.3% 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 profit opportunities just like this one.