Support and Resistance
The white line on the accompanying chart indicates a long-term support zone around $380. Over the last six months, the price has reacted multiple times at this level, both during bounces and pullbacks. Currently, HD is back at this crucial support level, and after touching it, there are early signs of recovery.
MACD (Moving Average Convergence Divergence)
The MACD serves as a reliable indicator for potential reversals. While the standard settings of (12, 26, 9) are commonly used, they can lag behind market movements. For a more immediate read, I prefer using the (5, 13, 5) settings. As of now, the MACD line (blue) has not yet crossed above the signal line (yellow), making it essential to wait for this confirmation before proceeding.
RSI (Relative Strength Index)
The RSI is another valuable tool for gauging momentum, highlighting overbought or oversold conditions and aiding in the identification of reversals. A stock is considered oversold when the RSI dips below 30, with confirmation occurring when it climbs back above this threshold. For HD, we remain in a wait-and-see mode until this condition is met.
If you’re interested in similar trades, my trading algorithm applies rules and discipline to options trading, consistently outperforming benchmarks. You can see it in action here.
The Trade Setup: HD 380-385 Bull Call Spread
To capitalize on a potential upward movement in HD, I am implementing a bull call spread, which offers defined risk and payoff. By the time the RSI and MACD provide confirmation, I anticipate the price to be slightly higher, likely within the 380–390 range. A vertical spread is straightforward: it involves buying a call and selling a call with the same expiration date, using strike prices that bracket the current trading price. For instance, if HD is trading at $383, a 380–385 bull call spread would be appropriate.
If HD closes at or above the short strike (385 in this case) by expiration, the spread will yield its full value of $5.00, transforming an initial investment of approximately $2.50 into a 100% return. For 10 contracts, this translates to a risk of $2,500 for a potential gain of $2,500.
Here’s my exact trade setup:
Buy $380 call, Nov 7th expiry
Sell $385 call, Nov 7th expiry
Cost: $250
Potential Profit: $250
-Nishant Pant
Founder: Trade With Maya
Author: Mean Reversion Trading
Follow on Twitter: @TheMeanTrader
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