Extended ‘Sell’ Signal for Generac

Dear Reader,

On Friday, we looked at a Daily Price Chart of Twilio Inc., noting that the stock had rebounded above the lower Keltner Channel into the ‘Sell Zone’.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for Generac Holdings Inc. stock symbol: GNRC.

Before breaking down GNRC’s monthly chart let’s first review what products and services the company offers.

Generac Holdings Inc. designs, manufactures, and sells power generation equipment, energy storage systems, and other power products for the residential, and light commercial and industrial markets worldwide. The company offers engines, alternators, batteries, electronic controls, steel enclosures, and other components. It also provides residential automatic standby generators ranging in output from 7.5kW to 150kW.

Now, let’s begin to break down the monthly chart for GNRC stock.

Below is a 10-Month Simple Moving Average chart for Generac Holdings Inc.

Sell GNRC Stock

As the chart shows, in December 2021 the GNRC 1-Month Price, crossed below the 10-Month simple moving average (SMA).

This crossover indicated the selling pressure for GNRC stock exceeded the buying pressure. For this kind of crossover to occur, a stock has to be in a strong bearish downtrend.

Now, as you can see, the 1-Month Price is still below the 10-Month SMA. That means the bearish trend is still in play!

As long as the 1-Month price remains below the 10-Month SMA, the stock is more likely to keep trading at new lows and bearish positions should be initiated.

Our initial price target for GNRC is 89.50 per share.

86.0% Profit Potential for GNRC Option

Now, since GNRC’s 1-Month Price is trading below the 10-Month SMA this means the stock’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for a GNRC put option purchase.

The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat GNRC price to a 12.5% decrease.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following GNRC option example, we used the 1% Rule to select the GNRC option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select a GNRC in-the-money option strike price, GNRC stock only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if GNRC stock is flat at 94.68 at option expiration, it will only result in a 7.7% loss for the GNRC option compared to a 100% loss for an at-the-money or out-of-the-money put 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 higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.

The prices and returns represented below were calculated based on the current stock and option pricing for GNRC on 12/16/2022 before commissions.

When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to decline in price.

For this specific put option, the calculator analysis below reveals if GNRC stock decreases 5.0% at option expiration to 89.95 (circled), the put option would make 39.1% before commission.

If GNRC stock decreases 10.0% at option expiration to 85.21 (circled), the put option would make 86.0% before commission and would greatly outperform the stock 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 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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Wishing You the Best in Investing Success,