Pharma ETF Offers Strong Setup

From July 9th, 2024

Pharma ETF Offers Strong Setup

July 8th, we looked at a Daily Price Chart of TransMedics Group Inc., noting that TMDX’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.

Yesterday, Trade of the Day we will be looking at a Keltner Channel chart for the VanEck Vectors Pharmaceutical ETF, symbol: PPH.

Before breaking down PPH’s daily Keltner Channel chart let’s first review the investment objective of the ETF.

The VanEck Vectors Pharmaceutical ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Pharmaceutical 25 Index, which is intended to track the overall performance of companies involved in pharmaceuticals, including pharmaceutical research and development as well a production, marketing and sales of pharmaceuticals.

Now, let’s begin to break down the Keltner Channel chart for PPH. Below is a Daily Price Chart and the three Keltner Channels for the PPH ETF.

Buy the PPH ETF

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether an ETF is overbought or oversold. If an ETF’s daily share price is trading above the upper Keltner Channel, this signals that the ETF is temporarily overbought and subject to a retracement.

Even ETFs that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When an ETF becomes overbought, its price will typically decline soon after as the inevitable profit taking occurs.

The PPH daily price chart shows that the ETF is in a strong price uptrend and has become overbought several times. You can see this as PPH has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when PPH became overbought, the ETF soon experienced a pullback.

Finding opportunities when an ETF experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when an ETF is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the ETF is likely to rally.

Our initial price target for the PPH ETF is 93.20 per share.

104.4% Profit Potential for PPH Option

Now, since PPH shares have retraced into the Keltner Channel ‘Buy Zone’, this offers a strong trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for a PPH 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 PPH 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 PPH option example, we used the 1% Rule to select the PPH 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 a PPH in-the-money option strike price, PPH 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 ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if PPH shares are flat at 91.53 at option expiration, it will only result in a 1.4% loss for the PPH 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 can 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 ETFs.

The prices and returns represented below were calculated based on the current ETF and option pricing for PPH on 7/8/2024 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.

For this specific call option, the calculator analysis below reveals if PPH shares increase 5.0% at option expiration to 96.11 (circled), the call option would make 51.5% before commission. 

If PPH shares increase 10.0% at option expiration to 100.68 (circled), the call option would make 104.4% before commission and outperform the ETF return more than 10 to 1*. 

The leverage provided by call options allows you to maximize potential returns on bullish ETFs.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

*Trading incurs risk and some people lose money trading.

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