Taking advantage of a bull triangle
As the following graph shows, the price of shares in Colliers International Group (CIGI) has clearly been on a bullish trend since the stock bottomed out at $58.51 on September 19, 2017. We can see that the 200-day moving average (in red) provided support when the price fell in February 2018, and that, throughout the series, the 50-day moving average (in blue) appears to act as a support level. In addition, the RSI (5) (the Relative Strength Index over 5 trading sessions) is on the rise. At the same time, the stochastic oscillator clearly has upward momentum, staying above 75 since February 2018. At this point in time, we have reached a major inflection point, with prices very close to their 50-day moving average while a bull triangle formation takes shape. The bull triangle is a technical formation representing a short pause in a prevailing trend. In this case, we expect prices to break out on the upside and head toward a target price of $105, if we apply the width of the triangle at its narrowest end.
Daily Chart for CIGI ($95.29, Friday, June 15, 2018)
An investor interested in profiting from this scenario could buy call options expiring on October 19, 2018, choosing the strike that would yield the best return if the price reaches $105.00 on expiration.
We will choose from among the following calls:
- CIGI 181019 C 92 at $7.05
- CIGI 181019 C 94 at $5.90
- CIGI 181019 C 96 at $4.95
- CIGI 181019 C 98 at $3.95
Position
Comparative table of call options
As the above table shows, given these four call options, it is CIGI 181019 C 94 at $5.90 that has the optimal combination of risk and return, offering a potential return of 86.44% if CIGI reaches the target price of $105.00 on October 19, 2018. We will therefore carry out the following transaction:
- Purchase of 10 call options, CIGI 181019 C 94, at $5.90
- Debit of $5,900
Profit and loss profile
Target price on the call options, CIGI 181019 C 94 = $11.00 ($105.00 – $94.00)
Potential profit = $5.10 per share ($11.00 – $5.90), for a total of $5,100
Potential loss = $5.90 per share (premium paid), or $5,900
Intervention
Even though the target price for CIGI is $105.00, our potential profit is tied to the $11.00 target price on the call options. Therefore, as soon as the price of the calls reaches $11.00, we will liquidate the position, even if CIGI has not yet reached the target price of $105.00.
Good luck with your trading, and have a good week!
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
President
Monetis Financial Corporation
Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.
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