I just spotted a signal from one of my most reliable indicators. Let me take you through how I spotted it and what it could potentially turn into, states Chuck Hughes of Hughes Optioneering.
Finding a stock with strong upside momentum can create a winning trade environment. When you know the conditions are right for trading, you can set up a trade that fits your personal risk and profit profile. While trading always includes a risk of loss, our goal is to look for trades that help to manage as much of that risk as possible. This is why I like the Moving Average Convergence/ Divergence (MACD) indicator especially when it highlights a pattern like the one we are seeing for Merck & Co., Inc. (MRK). Check out the chart below.
Currently, the 24/52 Day MACD line is trading above the 18-Day EMA meaning that MRK is on a 'Buy' Signal. As long as the 24/52 Day MACD line remains above the 18-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks.
Amplify Potential Returns!
Since MRK’s bullish run is likely to continue, let’s use the Hughes Optioneering calculator to look at the potential returns for an MRK 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 MRK price to a 12.5% increase. The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
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 MRK stock increases 5.0% at option expiration to 127.34 (circled), the call option would make 55.8% before the commission. If MRK stock increases 10.0% at option expiration to 133.41 (circled), the call option would make 117.3% before the commission and outperform the stock return by nearly 12 to one.
The prices and returns represented below were calculated based on the current stock and option pricing for MRK on 1/29/2024 before commissions.