Stocks Are Falling: BJ Missed the Memo

Dear Reader,

Following the market’s open this morning, I began the day how I normally do, looking to see if there were any new stocks that looked strong enough to merit being added to my ‘Buy List’.

As I was looking, one stock in particular really stood above the rest. The stock I am talking about is BJ’s Wholesale Club Holdings, Inc., symbol: (BJ).

You may be asking yourself, how did you find this stock, Chuck? Well, it was pretty simple really, let me tell you about one truly elementary screening method I consistently use to find stocks as they are breaking out to the upside.

This one method I use to spot stocks in powerful uptrends is checking the daily ‘New 52-Week Highs’ list. If a stock like BJ appears on the New 52-Week Highs list for consecutive days, this series of new highs is a signal that the stock is currently experiencing a breakout higher.

You can see below in the current chart of BJ’s Wholesale Club Holdings, Inc. that the stock is displaying exactly the type of bullish breakout that I’m looking for. BJ shares have been making a series of new 52-Week Highs since early this month.

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The reason that I look for stocks that have recently made a series of new 52-Week Highs is that generally there is strong conviction from investors which translates to strong buying pressure for the stock. This flood of buying pressure will result in the stock making a move higher.

Oftentimes, once a stock makes a series of new highs, the breakout is not over and done with, in fact, in many cases it’s just getting started. In powerful bull markets, stocks breaking out to the upside can often continue to trade higher for longer than most investors may think.

So, when I spot a stock with a compelling breakout like BJ, this is a stock I want to add to my ‘Buy List’ so that I can keep an eye out for a good trade setup.

How I Would Look to Trade It

Now that we have become aware of BJ’s bullish breakout higher, the next thing we want to search for is an attractive trading setup for the stock.

Of course, you could simply buy the stock shares, which we sometimes do, but, many times when we spot a setup like this we want to add a bit more leverage to our position to unlock more explosive profit potentials.

With a setup like this, we like to find a call option to purchase which would provide us with a little more leverage on our trade. By doing this, should the bullish trend continue, our trade is positioned to produce higher profits when compared to just owning the underlying stock shares.

When selecting which call option to purchase, I often rely on my 1% Rule to help narrow down my choice of option strikes. The 1% Rule helps me select an in-the-money option that has a higher probability of producing a profit when compared to an at-the-money or out-of-the money option. Once I have one selected I will vet the trade using my Call Option Purchase calculator to determine the trade’s profit potential.

Below is a snapshot of my Call Option Purchase Calculator that shows the profit potential analysis for my trade. This example examines a range of BJ shares remaining flat up to a 12.5% increase at option expiration.

86.3% Profit Potential for BJ Option

The trade analysis shows that if BJ shares were to increase by just 1% at option expiration, this trade would make 4.4%.

Then looking at a few of the bigger potential moves, if BJ shares were up 5.0% at option expiration, our option would be set to profit 40.8%!

If that doesn’t sound good enough, get this, if BJ shares were up 10.0% at option expiration, this call option would be set to produce an 86.3% profit! That means the call option would outperform the stock nearly 9 to 1!

By following my 1% Rule to select which call options to purchase, this has helped me in the past to juice my trade’s profit potential, just like in the example shown above. Additionally, the 1% Rule helps to increase the odds that the option will profit as the underlying stock only has to increase by 1% for the option to begin profiting.

The Hughes Optioneering Team is here to help you identify high-probability trades 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.

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