Technical Analysis stock trading depends on fundamentals
The stock market is an event driven asset class where the reward for the risk associated with timing the market is significant. Due to the powerful influence of psychology and emotional issues on trading behavior, technical analysis can help to improve your chances of success. As the saying goes “Past performance is not an indicator of future results” While each individual situation is unique, fundamental research can be applied to many different types of stocks.
Stock assets accounted for a greater share of consumption than previously thought, as the sharp decline in energy prices has narrowed the gap between the prices of household assets and liabilities, according to the Bank for International Settlements.
“From a broad perspective, people are borrowing less,” Philip Shaw, an economist at Investec, wrote in a report. “By not borrowing more, households have more to spend today, leading to some rather hopeful signs of a pickup in consumer spending.”
Options fundamentals suggest potential for long put trades We also identified an even more extreme move, selling the September put (Buy 4900 strike at a strike of 4850 for an upfront credit of $1380) and buying the October put (Buy 5080 strike at a strike of 4900 for an upfront credit of $1395).
So, you are taking $1395 upfront and writing a $4140 call spread and you are guaranteeing to make $1,040 up front. That trade has potential to make $1,780 if September is at $35 and the October puts are near $50 in the next few months. In other words, the risk to reward on this trade is worth $4,130, a 7.9% implied return.
You are buying insurance and if the future plays out as forecast, then you made a good trade.
You should expect a time window between September and October to buy the calls and write the underlying trade and you would set an expiration date somewhere between October 10 and October 15. The fall season tends to be a weak season for JWN so this strategy makes sense.
You could look at October calls for $10 with a high likelihood that they would be exercised since many Seeking Alpha authors are long JWN. On the downside, you are almost certainly going to get the premium you paid back if September turns out to be a good buy.
If you think the stock is going to fall below $35 and stay below that level, then you are going to buy the October calls for $20 and exercise them by the expiration date. In other words, you will collect $40 ($20 premium plus the $10 you wrote) for selling a contract for $20.
The upside is you are buying the stock at $35 and selling the call for a premium. The downside is if you never exercise the call and the stock falls to $35, you will have missed a very nice trade. The time to do this trade would be at the very end of September.
That is when the options expire. The key is, if the stock rallies and the call is never exercised, you make $40. But if you write it and the stock rallies, but you don’t exercise it, you end up with zero money. Overall, I am sticking with Delta.
I still like the business, I like the management team and I like the valuation. That is a winning combination to me. As always, do your due diligence and consider all of the facts when making a decision.
Disclosure: I am/we are long CMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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I am not a registered investment advisor. Investors should do their own research or consult a financial advisor to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate.
