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This restaurant stock could be in for more tough times. How to trade it
I am going to explore an interesting trade set-up using three exponential moving averages to identify a restaurant stock that will continue to trend downward. I’ll review how I plan to capitalize on that move using options. Looking at the one-year daily chart of Olive Garden-parent Darden Restaurants (DRI) , you’ll notice the stock has faced resistance around the $175 level and is currently in a downtrend. Although one might argue that most of the bearish move has already occurred and a relief rally could be on the horizon, this trade idea is based on the assumption that DRI will continue to decline following an EMA crossover. Exponential moving averages crossovers are a popular method for detecting trend changes in the market. You can find similar setups like these in my book Mean Reversion Trading . In the chart below, I have used three EMAs: BLUE LINE – 10-day EMA YELLOW LINE – 21-day EMA PINK LINE – 34-day EMA Alternatively, you could use 10, 20, and 30-day EMAs as the information they present is quite similar. I’ve highlighted several instances over the past year where the 10-day EMA crossed either above or below the 21-day EMA. These crossovers are closely monitored by both swing traders and long-term investors, as they typically signal a shift in the trend. Over the last five occurrences of this crossover, it has proven to be a reliable signal for a trend shift, with the stock continuing in its prevailing direction. The trade Building on this analysis, I’m considering a bearish strategy on DRI, using a trade structure known as a bear put spread. Here is the exact trade setup: Buy $165 put Oct 18th expiry Sell $160 put Oct 18th expiry Limit Price: 2.50 If DRI is trading at $160 or below on expiration date, this trade will generate a 100% ROI on the amount risked. Adding 10 contracts to this trade risks $2500 to make $2500 and provides a robust ROI for the capital risked. -Nishant Pant Founder: Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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