This Technical News and Technical Breakout Sets Up a Potential Gain
News and the chart can often combine to set up trading opportunities.
Business Wire reported news that,
“Emerson (NYSE: EMR) is partnering with Cisco to introduce a next-generation industrial wireless networking solution that fundamentally transforms data management to improve plant productivity, reliability and safety. “
The chart below shows the price move that followed the announcement pushed the price above resistance that has defined the stock’s trading for the past three months.
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Business Wire continued, “The new Emerson Wireless 1410S Gateway with the Cisco Catalyst® IW6300 Heavy Duty Series Access Point combines the latest in wireless technology with advanced WirelessHART sensor technology, delivering reliable and highly secure data, even in the harshest industrial environments.
To help enable new digital transformation strategies, this industrial networking solution combines Emerson’s expertise in industrial automation and applications with Cisco’s innovations in networking, cybersecurity and IT infrastructure.
Driven by the demand for greater productivity, lower maintenance costs and improved worker safety, industrial manufacturers are accelerating investment in robust IoT sensor networks combined with scalable operational analytics tools to improve organizational collaboration and decision making.
In these environments, network performance and security are critical for success.
“A secure connection that scales easily is the foundation for every successful IoT deployment,” said Liz Centoni, senior vice president and general manager, IoT at Cisco.
“By using the power of the intent-based network, Cisco provides a secure, automated, rock solid infrastructure helping IT and operational teams work together to reduce complexity and improve safety.”
This next-gen wireless access point provides enhanced wi-fi bandwidth necessary for real-time safety monitoring, including Emerson’s Location Awareness and wireless video. These applications enhance personnel safety practices, improve plant security and help ensure environmental compliance.
A reliable and fast connection between devices and people streamlines decision making by providing real-time analytics. It also enables a mobile workforce to virtually come together, collaborate and resolve critical issues in a timely manner.
“Products installed in industrial plants need to last for years, even decades,” said Bob Karschnia, vice president of wireless at Emerson. “This kind of longevity was a critical design and engineering requirement to ensure this new wireless access point was future-proofed to meet a rapidly evolving technology landscape.”
The weekly chart below shows that if the break above the short term resistance level can be sustained, there is significant upside potential in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying EMR could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for EMR
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For EMR, the December 20 options allow a trader to gain exposure to the stock.
A December 20 $67.50 call option can be bought for about $2.30 and the December 20 $70 call could be sold for about $1.45. This trade would cost $0.85 to open, or $85 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $85.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in EMR the maximum gain is $1.65 ($70 – $67.50= $2.50; $2.50 – $0.85 = $1.65). This represents $165 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $85 to open this trade.
That is a potential gain of about 94% in EMR based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.