Unlock Huge Potential With Value ETF?
August 29th, 2024
Unlock Huge Potential With Value ETF?
Dear Reader,
Yesterday, we looked at a Daily Price Chart of Arch Capital Group Ltd., noting that ACGL’s 24/52 Day MACD is trading above the 18-Day EMA signaling a ‘Buy’.
For today’s Trade of the Day e-letter we will be looking at a monthly chart for the Vanguard Value ETF, symbol: VTV.
Before breaking down VTV’s monthly chart let’s first review the investment objective of the ETF.
The Vanguard Value ETF (VTV) seeks to track the performance of the CRSP US Large Cap Value Index.
Now, let’s begin to break down the monthly chart for the VTV ETF.
Below is a 10-Month Simple Moving Average chart for VTV.
Buy the VTV ETF
As the chart shows, in November, the VTV 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for VTV exceeded the selling pressure. For this kind of crossover to occur, an ETF has to be in a strong bullish uptrend.
Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!
As long as the 1-Month price remains above the 10-Month SMA, the ETF is more likely to keep trading at new highs and should be purchased.
Our initial price target for VTV is 173.50 per share.
132.3% Profit Potential for VTV Option
Now, since VTV’s 1-Month Price is trading above the 10-Month SMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a VTV 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 VTV 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 VTV option example, we used the 1% Rule to select the VTV 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 VTV in-the-money option strike price, VTV shares only have 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 VTV is flat at 171.11 at option expiration, it will only result in an 8.6% loss for the VTV 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 VTV on 8/29/2024 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 VTV increases 5.0% at option expiration to 179.67 (circled), the call option would make 61.9% before commission.
If VTV increases 10.0% at option expiration to 188.22 (circled), the call option would make 132.3% before commission and outperform the ETF return more than 13 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.