Chugging Forward, Ignoring Any Pullback

Kansas City Southern, $KSU, broke above its 200 day SMA last Thursday before the 4th of July holiday. It started the week holding tight to that level stoking its boiler, before a break higher Wednesday in the face of a falling broader market. If you are looking for a safe haven in the storm or just a great opportunity from the existing price action this is the stock to be in. Take a look at the chart. The price bars are expanding as it moves higher. The momentum indicators RSI and MACD are rising, supporting more upside. The Bollinger bands are opening to the up side. And there is a gap to fill to 116.50. You could use Thursday’s low or the 200 day SMA as a stop as you enter a trade looking for that gap to fill, and maybe more.


What’s that? You are worried about a further pullback drawing it lower? First turn off your TV, and then consider limiting your risk by using options instead of stock to participate in the gap fill. The company reports earnings before the open on the 18th, expiration Friday, so consider the July 112 Calls (offered at $2.85 as I write) as a defined risk way to participate in the upside. If you are fine with it being capped at the 116 gap fill then also sell the July 116 Calls (75 cents) to cut your capital outlay by 25%. And if you have margin room, selling the July 105 Puts (55 cents) cuts the capital outlay further, while opening the risk of being put the stock at 105 next week on a large move lower.

Get my book, Trading Options: Using Technical Analysis to Design Winning Options Trades.


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