Take advantage of EQR’s downtrend?

0

On Friday, we looked at a daily price chart of the Select Sector SPDR Fund ETF (XLF), noting that XLF’s OBV line is down, validating the recent trend, says Chuck Hughes from TradeWinsDaily.

For today’s Trade of the Day email, we’ll be looking at a monthly chart for Residential Real Estate Trust (EQR).

Before breaking down EQR’s monthly chart, let’s first take a look at the products and services the company offers. Equity Residential is committed to creating communities where people thrive. The Society, member of the S&P500 (SPX), focuses on the acquisition, development and management of residential properties located in and around dynamic cities that attract high-quality, long-term tenants.

Now, let’s start breaking down the monthly EQR stock chart. Below is a 10 month simple moving average chart for Equity Residential Property Trust.

Sell ​​EQR shares

As the chart shows, in April, the one-month EQR price broke below the ten-month simple moving average (SMA). This crossover indicated that the selling pressure for EQR shares exceeded the buying pressure. For this type of crossover to occur, a security must be in a strong downtrend.

Now, as you can see, the one-month price is still below the ten-month SMA. This means that the downtrend is still in play! As long as the one-month price remains below the ten-month SMA, the stock is more likely to continue trading at new lows and bearish positions should be initiated. Our initial price target for EQR is 63.50 per share.

114.3% profit potential for the EQR option

Now, given that the 1-month EQR price is trading below the 10-month SMA, this means that the bearish decline for the stock is likely to continue. Let’s use the Hughes Optioneering Calculator to examine the potential returns from an EQR put option purchase.

The put option calculator will calculate the potential profit/loss of a put option trade based on the price change of the underlying stock/ETF at option expiration in this example , from a fixed EQR price to a decline of 12.5%.

The Options Team uses the 1% rule to select an option strike price with a higher percentage of winning trades. In the following EQR option example, we have used the 1% rule to select the EQR option strike price, but in fairness to our paid options service subscribers, we do not do not indicate the strike price used in the profit/loss calculation.

Trade with greater precision

When you use the 1% rule to select an in-the-money EQR option strike price, the EQR stock only needs to decline by 1% for the option to break even and start to take advantage of it! Remember that if you buy an at-the-money or out-of-the-money put option and the underlying stock closes flat when the option expires, it will result in a 100% loss to your trade. options! In this example, if EQR stock is stable at 67.22 when the option expires, this will only result in a loss of 5.7% for the EQR option compared to a loss of 100%. for an at-the-money or out-of-the-money put option. 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 put options. This greater accuracy can give you the discipline to become a successful options trader and can help you avoid 100% losses when trading options.

The purpose of this example is to demonstrate the powerful profit potential available from trading options versus stocks. The prices and yields represented below have been calculated based on the current price of shares and options for EQR as of 30/09/2022 before commissions. When you buy a put option, there is virtually no limit to the profit potential of the put option if the underlying stock price continues to fall.

For this specific put, the calculator analysis below reveals that if EQR stock declines 5.0% at option expiration at 63.86 (circled), the put would pay 54.3% before commission. If EQR stock declines 10.0% at option expiration at 60.50 (circled), the put option would return 114.3% pre-commission and significantly outperform the stock’s return*.

The leverage provided by put options allows you to maximize potential returns on bearish stocks. The Hughes Optioneering team is here to help you identify profit opportunities like this.

A screenshot of a computer Description automatically generated with medium confidence

Read more about Chuck Hughes here

Share.

Comments are closed.