For today’s Trade of the Day e-letter we will be looking at a daily price chart for Novo Nordisk A.S. (NVO), states Chuck Hughes of Hughes Optioneering.
Before breaking down NVO’s daily chart let’s first review what products and services the company offers. Novo Nordisk A/S, a healthcare company, engages in the research, development, manufacture, and marketing of pharmaceutical products worldwide. It operates in two segments, Diabetes and Obesity care, and Rare Diseases.
Now, let’s begin to break down the Daily Price chart for NVO stock. Below is a Daily Price chart with the 50-day EMA and 100-day EMA for NVO.
50-Day EMA and 100-Day EMA ‘Buy’ Signal
The 50-day Exponential Moving Average (EMA) and 100-day EMA are moving average indicator lines that can provide buy and sell signals when used together. When the shorter-term 50-day EMA crosses above or below the longer-term 100-day EMA, this provides either a buy or sell signal depending on which direction the stock price is moving.
- 50-Day EMA line Above 100-Day EMA = Price Uptrend = Buy signal
- 50 Day EMA line Below 100-Day EMA = Price Downtrend = Sell signal
When the 50-day EMA (blue line) crosses above the 100-day EMA (red line) this indicates that the stock’s buying pressure has begun to outweigh the selling pressure signaling a ‘buy’ signal. When the 50-Day EMA crosses below the 100-Day EMA this indicates that the selling pressure has begun to outweigh the buying pressure signaling a ‘sell’ signal.
Buy NVO Stock
As the chart shows, on November seventh, the NVO 50-Day EMA, crossed above the 100-Day EMA. This crossover indicated the buying pressure for NVO stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish trend. Now, as you can see, the 50-Day EMA is still above the 100-Day EMA meaning the ‘buy’ signal is still in play. As long as the 50-day EMA remains above the 100-day EMA, the stock is more likely to keep trading at new highs and should be purchased. Our initial price target for NVO stock is 106.50 per share.
Profit if NVO is Up, Down, or Flat
Now, since NVO’s 50-day EMA is trading above the 100-day EMA and will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for an NVO call option spread. The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in NVO stock at option expiration.
The goal of this example is to demonstrate the ‘built-in’ profit potential for option spreads and the ability of spreads 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 prices used in the profit/loss calculation. The prices and returns represented below were calculated based on the current stock and option pricing for NVO on 10/17/2023 before commissions.
Built-in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $325 (circled). The maximum risk for an option spread is the cost of the spread. The analysis reveals that if NVO stock is flat or up at all at expiration the spread will realize a 53.8% return (circled). And if NVO stock decreases 7.5% at option expiration, the option spread would make a 53.8% return (circled).
Due to option pricing characteristics, this option spread has a ‘built-in’ 53.8% profit potential when the trade was identified. Option spread trades can result in a higher percentage of winning trades compared to a directional option 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.