|
Autodesk Inc (ADSK on Nasdaq) is a software development business for the corporate world. After a less than impressive start to the year the share price has risen 30% from the March low. However my technical analysis indicates that the stock may be in for a retracement. An option trader can take advantage of a potential downward move where a nice profit is harvested whilst limiting risk.
At the time of writing AutoDesk is a mere $0.13 from making an all time high which was reached 20 months ago (November 2 2005) at a price of $48.27 providing us with a potential double top. Around this price level there are two other ranges that come in forming a price clustering. The first significant range of the current bull campaign started on July 10 2006 and ran up to September 21 giving a price range of $7.71. Using the ABC Pressure Point Drawing Tool (available in the ProfitSource Safety in the Market (SITM) module) and adding it to the March 29 2007 low has the 150% milestone coming in at a price of $48.31. This is shown below in Chart 1 by the orange arrows. Applying a larger range from July 10 2006 up to the first of the double tops on January 17 2007 to the March 29 low has the 75% milestone coming in at $48.55. This is illustrated by the purple arrows below. A blue trend line has been drawn which ADSK has not closed below. This could be watched closely and used as a potential entry trigger.
Chart 1 – ADSK Daily Bar Chart with Price Analysis
click chart for more detail
Adding time analysis into the equation also provides support evidence that a correction may be near. The larger range taken above ran up for 191 calendar days. There are 95 days between the March low and early July which means this second leg has now reached 75% of the price in half the time. Running the Time Cycle Analysis Tool from June 28 shows 90 degrees as a vibration level worth noting. Remember a major low occurred on July 10 last year.
Chart 2 – ADSK Daily Bar Char with Time Analysis
click chart for more detail
If a correction is to occur a pull back between $40 and $45 is expected in the next 3-6 weeks. Implied Volatility on ADSK options is still very low so an OTM put calendar spread is a suitable strategy. Selling the August and buying the October 42.5 puts can be done for a debit of $65. This is the trade’s maximum risk no matter what happens. Should ADSK trade to a price of $45 in mid August a profit of at least $120 is expected. I say at least because as the stocks drops IV will rise giving the trade even wider breakevens and a greater maximum profit. Chart 3 below shows the risk graph for this calendar spread from OptionGear. The green shaded square rectangle shows the profit zone whilst the red rectangles show the loss area.
Chart 3 - ADSK Risk Graph
click chart for more detail
When both price and time come together a strong setup is achieved however this is only half the job. The other half requires the correct strategy to be adopted and effective money management to be employed. In this trade the risk has been curtailed to $65 providing the trader with little to no stress. This is how I like to trade and I am sure each of you equally wishes for a similar ‘stress free’ approach. Please be aware an earning announcement is scheduled for mid August so you may have to close the trade beforehand.
Make it happen!
Guy Halpin
|