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One of the biggest mistakes options traders make is also one of the easiest to fix.
Trading without an options strategy can doom your returns. Fortunately, there's a simple trading strategy that can help you find upside right away.
Most investors have heard the old saw, "The trend is your friend." It means the stock market tends to move in trends. If you can find that trend, you will be better prepared for what's to come and better able to choose the right strategy.
The problem is finding the trend. Many traders use moving averages as proxies for the trend. Short moving averages, such as the 20-day moving average, help follow short-term trends. Likewise, long averages, such as the 200-day moving average, help them stay on the right side of the long-term trend.
While these are important tools, we can do even better.
Money Morning Quantitative Specialist Chris Johnson is a big fan of the 50-day moving average.
The 50-day moving average is in the goldilocks zone of not being too short or too long. Chris says the 50-day moving average is the best proxy for the trends that can help you make money.
You can see the 50-day average on most free charting packages online, like StockCharts. The idea is to own stocks above their 50-day averages and sell them when they are below. That implies that the average serves as a support floor or resistance ceiling that can help find possible turning points in the stock's price.
But Chris takes it one step farther.
He looks for stocks with upside potential and uses the 50-day moving average to find the perfect entry point to make the most money.
Here's how he does it, including a stock that's currently flashing a 50-day buy signal. We'll show you that stock and the call options to buy to make the biggest profit...
How This Options Strategy Revealed a Buy Signal
It is no secret that Chris likes the green energy sector.
He thinks it has game-changing potential, and he frequently finds trades in this area. One setup he likes now is in First Solar Inc. (NASDAQ: FSLR), a maker of solar power systems and modules.
As the incoming administration has made fighting climate change a priority, clean solar power is right in the middle of that initiative. Solar generation is making the move from small installations, such as powering one house through rooftop panels, to large-scale utilities, where solar collection can cover acres of land with enough juice to power a small city.
That's creating upside opportunities in solar stocks left and right.
Since late September, First Solar stock gained about 63%, but in recent days, it has stalled around the $100 per share mark. That suggests buyers are still active and able to soak up all the shares profit-takers are selling. But Chris sees that last week's large single-day drop pumped up volatility and left the stock ripe for "buy the dip" bulls.
The 50-day moving average is rising and now at about $94 per share. It's proven to be a strong support area for this stock. Chris expects the trend could set the stock up for a rally to about $115.
You can buy the stock outright right now to make a quick 10% gain, but options trading offers an even bigger return.
Chris' recommended way to profit from the rebound is with call options. Specially, he suggests looking for near-the-money call options that expire in about three to six months. For example, that could mean the FLSR April 16, 2021 $105 calls, currently trading at about $11.20.
That can offer you a quick 50% upside if the stock hits Chris's price target in February.
Don't forget; the 50-day average is just another strategy in the options toolbox, and it is much more powerful when used with other signals. But even if you don't delve into its innermost parts, just knowing where the stock is with relation to the average and whether the average is sloping higher or lower will put you way ahead of the game.
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