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Autodesk Inc. is a software development company that is listed on the Nasdaq Stock Exchange under the ticker symbol ADSK. This stock is very rarely range-bound, which provides directional traders with potential profits if they can get on board at the right time. In this article I will show how some basic technical analysis points to Autodesk possibly heading higher in the next month or so.
As our regular readers would be aware, 50% of a range is an important number to watch out for. In Chart 1 below I have taken a longer term perspective from the January 2005 low to the proceeding November high. 50% of this range formed a resistance level ($37.24) throughout 2006 in June, September and October. When it broke through in November it sure did it in style! In late March this strong resistance level became support.
Chart 1 – ADSK Daily Bar Chart
click chart for more detail
Zooming in to a more recent price range we can see this price level being derived from another 50% range. Chart 2 illustrates the July 2006 to January 2007 range where 50% comes in at a price of $37.38. In this chart the purple arrows in July and September are almost exactly the same price range. This is the range I am using to give a target price of $45.53 for May.
Chart 2 – ADSK Daily Bar Chart
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I encourage more advanced Safety in the Market students to do some further study by taking a look at TxD off the March 2007 low, using the Gann Fan (trading and calendar) from the July 2006 low and projecting ranges off the recent double tops and double bottoms.
Now that a directional bias has been formed it is time to find the most appropriate options trade to take advantage of any upward move. The Implied Volatility (IV) chart for Autodesk shows we are currently in the lower 10% range of the past three years and beyond! This means the options are cheap. I investigated a long call but couldn´t find a satisfactory reward to risk ratio. This is where knowing some advance strategies helps. Chart 3 shows an Out of The Money (OTM) long call calendar spread created using OptionGear. This trade involves selling a May 07 42.50 call and buying a July 07 42.50 call for a debit of $85. If Autodesk trades to the mid $42 mark by mid May we would be looking at a profit of at least $128. I say at least, because earnings are scheduled for mid May and we can expect IV to rise into this date. With a history of gapping after earnings are released I recommend setting the day of earnings or May 18 as the time stop, whichever event occurs first.
Chart 3 – ADSK Calendar Spread Risk Graph
click chart for more detail
Combining a strong technical setup with the right options gives a trader an edge. I look forward to sharing my knowledge with traders interested in OptionGear through the many PC Lab sessions scheduled at this year’s TradeFest.
Make it Happen!
Guy Halpin
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