Posted by Chuck Hughes | Jan 18, 2024 | Chuck’s Trade of the Day |

Did you spot this potential trade? If I hadn’t dialed in my options tools, I may have missed it as well. You may recognize the company we are looking at today—Republic Services, Inc. (stock symbol: RSG.) but even if you don’t, what you really need is the chart.

When I was a pilot, I couldn’t fly by just looking out the window. I had to use my gauges and instruments. Stock charts are similar to those gauges and make it possible to be more accurate in spotting great set ups.

On this chart we are going to look at the 10-Month Simple Moving Average.

As the chart shows, in March, the RSG 1-Month Price, crossed above the 10-Month simple moving average (SMA) shown as the blue line above. 

As long as the 1-Month price remains above the 10-Month SMA, the stock is more likely to keep trading at new highs and should be purchased. Our initial price target for RSG is 175.00 per share.

The good news is RSG is still above the 10-Month SMA so it has solid momentum to the upside and conditions are ripe for a bullish trade. But with just a couple more simple steps we can increase the profit potential for this trade by harnessing the power of call options.

How to Juice Up the Horsepower in This Trade Example

Now, since RSG’s 1-Month Price is currently trading above the 10-Month SMA and the stock will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for an RSG 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 RSG 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 RSG option example, we used the 1% Rule to select the RSG 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.

The prices and returns represented below were calculated based on the current stock and option pricing for RSG on 1/17/2024 before commissions.

119.9% Profit Potential for RSG Option

Look at the bottom line on the calculator.

For this specific call option, the calculator analysis below reveals if RSG stock increases 5.0% at option expiration to 174.51 (circled), the call option would make 54.2% before commission. 

If RSG stock increases 10.0% at option expiration to 182.82 (circled), the call option would make 119.9% before commission and outperform the stock return nearly 12 to 1*. 

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 call option, the calculator analysis above reveals the cost of the call option is $1,265 (circled). The maximum risk for a call option purchase is the cost of the trade.

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.

*Trading incurs risk and some people lose money trading.

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