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Trade of the Week – Long Call on WOW

June 1, 2022

Trade of the Week – Long Call on WOW

Woolworths Limited (ASX: WOW) has experienced selling pressure since 21st April 2022. The stock felt resistance around the $39.60 level, then traded around its 200-day MA for two weeks, then broke through and got caught on the 50-day MA for a week.

Woolworths Limited (ASX: WOW) has experienced selling pressure since 21st April 2022. The stock felt resistance around the $39.60 level, then traded around its 200-day MA for two weeks, then broke through and got caught on the 50-day MA for a week. On 19th May 2022, the stock made a strong break below the 50-day MA and is now sitting on its current support level around $34.50. The market experienced significant support at that level between 25th January and 22nd February 2022, and again between 3rd March and 8th March 2022.

Source: Implied Volatility

With the market consolidating around support over the last week, we expect to see some buying pressure re-enter the market. It is expected that the stock will rally towards $36 initially, with a potential second push up towards the 50-day MA (currently sitting slightly above $37, but sloping downwards).

Enter position: Long Call

Source: Implied Volatility

Consider entering into an American long call position with the strike set at $34.50, which is at-the-money and has decent liquidity, which can help with tighter spreads when entering and exiting the position. The expiry date could be set to 21st July 2022 to give plenty of time for the trade to run its course and hopefully meet the 50-day MA.

Source: Implied Volatility

This long call position will be theta negative, which means the longer you hold it the more it will decrease in value. The rate of theta decay will increase as the option approaches expiry. The maximum loss on the position is the upfront premium paid. The maximum profit is unlimited, as there is no maximum price a stock could theoretically move to. Implied volatility is currently relatively low when compared with the past 52 weeks, resulting in an IV rank of 14. A low IV rank means option premiums will be lower making a long call position quite cost effective for a bullish trade.

 

Source: Implied Volatility

Exit position:

Aim to close the position at one of two exit levels:

  1. If the stock makes a very quick move towards $36 then feels resistance. Closing after a quick move allows you to capture the remaining theta (time) value. This will be even more valuable if volatility rises at the same time.
  2. The stock meets the 50-day MA. Seeing the 50-day MA is sloping downwards, the market may quickly reject price action at this level. Even if the stock does break through, the next resistance level (200-day MA) is very close and may slow down further price appreciation.

For further information on using the Implied Volatility platform you can follow this link, here.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views. 

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General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

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