Trade Of The Week: Long Call on AGL Energy Ltd
AGL has been in a downward trend since mid-August 2020 after falling from around $17.00 down to a closing low of $12.48. However over the last week the stock has jumped from $13.00 to almost $14.00. The stock felt some resistance from the 50 Day MA on Monday 23rd of November but managed to break through with little effort by the next day.
AGL has been in a downward trend since mid-August 2020 after falling from around $17.00 down to a closing low of $12.48. However over the last week the stock has jumped from $13.00 to almost $14.00. The stock felt some resistance from the 50 Day MA on Monday 23rd of November but managed to break through with little effort by the next day.Source: Implied Volatility
The stock’s behaviour in August to November 2020 is reminiscent of it’s behaviour in August to November 2018.
In 2018 the stock’s short term downward trend (channel) bounced off it’s longer term downward trend (sloping support line). The stock also broke through it’s 50 Day MA and continued trading higher.
With this trade we want to capture as much value as possible between the 50 Day MA and the 200 Day MA over the next 3 weeks. We also want to keep the trade simple in the current environment, and with AGL’s IV around 20 there is no reason to complicate the trade with multiple legs. We will enter a long call position.
With a strike of $14.00 and an expiry date on the 17th of December 2020.
I expect the stock to bounce back much faster than in 2018 due to the strong recovery of the XJO. However if you prefer to buy some more time, you can add another month to the expiry (21st of January 2021) for an extra 57% of premium value.
If AGL reaches $15.00 you may consider taking your profits, however there is potential for the stock to meet the 200 Day MA around $15.50.
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