It looks like the summer of 2013 could be a repeat of last
summer with extreme volatility in crop prices thanks to more
potential drought concerns. Little, if any snow cover or moisture
to replenish the soil across much of the Midwest leaves the season
ahead vulnerable to another price shock.
Major agricultural chemical producer
is currently sitting at the low end of its two-year trading range
from $42 to $56. The chart pattern targets an $8 move from the
breakdown point at $50 to new multi-year highs at $58. Only a close
below the $40support level on a weekly basis would negate
The $58 target is almost 30% higher than current prices, but
traders who use a stock substitution strategy could make
triple-digit returns on a move to that level.
One major advantage of using longcall options rather than
buyingshares is putting up much less to control 100 shares --
that's the power ofleverage . But with all of the potential strike
andexpiration combinations, choosing anoption can be a daunting
Simplyput , you want to buy a high-probability option that has
enough time to be right, so there are two rules traders should
Rule One: Choose an option with 70%-plus
Delta is a measurement of how well an option follows the
movement in the underlying security. It is important to buy options
that pay off from a modest price move in the stock orETF rather
than those that only makemoney on the infrequent price
Any trade has a 50/50 chance of success. Buyingin-the-money
options increases that probability. Delta also approximates the
odds that the optionwill bein the money at expiration. In-the-money
options are more expensive, but they're worth it, as your chances
of success are mathematically superior to buying cheap,
out-of-the-money options that rarely pay off.
For example, with Dupont trading at about $44.75 at the time of
this writing, an in-the-money $40 strike call currently has $4.75
in real orintrinsic value . The remainder of any premium is thetime
value of the option.
Rule Two: Buy more time until expiration than you may
need -- at least three to six months -- for the trade to
Time is an investor's greatestasset when you have completely
limited the exposure risks. Traders often do not buy enough time
for the trade to achieve profitable results. Nothing is more
frustrating than being right about a move only after the option has
I recommend the Dupont Jan 2014 40 Calls at $6.50 or
A close below $40 in the stock on a weekly basis or the loss of
half of the option premium would trigger an exit. (Note: The52-week
low is $41.67.) If you do not use a stop, the maximum loss is still
limited to the $650 or less paid per option contract. The upside,
on the other hand, is unlimited. And the January 2014 options give
thebull trend over a year to develop.
This trade breaks even at $46.50 ($40 strike plus $6.50 option
premium). That is less than $2 above Dupont's current
price. If shares hit the upside breakout target of $58, then the
option would deliver triple-digit gains.
Action to Take -->
Buy Dupont Jan 2014 40 Calls at $6.50 or less. Set
stop-loss at $3.25. Set initialprice target at $18 for a potential
177% gain in 13 months.
This article originally appeared on TradingAuthority.com:
Charts Say This Trade Could Return a Potential
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