Taking the Express Route to Profit

It’s no secret that I spend most of my time in Florida, as my primary home is located in the Sunshine State.

I get a lot of jabs from my neighbors wanting to know why I “retired” so early, and looking at the average age of my neighbors here on the west coast of Florida, I understand why they ask.

Seriously though, a lot of Baby Boomers are now running smack dab into their retirement.

An aging population coupled with the rising cost of healthcare and prescription drugs is a potent brew for profiting in the healthcare sector.

And it’s no wonder that this company is in the spotlight with long-term analysts… and me.

Let’s find out how to take the “Profit Express” right now…

A Healthcare Sector Giant You Need to Know

Perhaps you have never heard of Express Scripts Holding Company (Nasdaq:ESRX), but you need to. ESRX is a pharmacy management company in the United States and Canada with over $102.4 billion in revenue. It’s a huge player in the healthcare sector, and is always in the spotlight with long-term analysts.

But is it ripe for a shorter-term technical trade?

I certainly think so. I love ESRX stock for two reasons.

Let’s take them one at a time, and use our charts to guide the way.

In the chart below, ESRX continues to show the higher-low, higher-high approach to its rising price. The first quarter of 2015 shows stock price lows at $82, and highs at $89.50. Meanwhile, second quarter lows came in at $83.75, and highs pushed $91.

Recently, ESRX pulled back to $85 before once again heading north to a recent stock price of $88. Just some quick calculations show the stocks lows getting higher by $1.75, while the most recent highs were $1.50. The next swing high should take the stock to $92.50, based on this analysis.

The second thing I love about this stock is that moving averages are moving in the right direction, as you can see in my next chart below.

Now it’s one thing to have a moving average below the price of a rising stock like ESRX, but it’s something else to have two moving averages help dictate buy and sell points on a stock.

Moving average crossovers do precisely that. They give traders an opportunity to buy rising stocks on pullbacks.

I love the 10- and 30-day moving averages on stocks that have the higher lows and higher highs on their charts. What I concentrate on is when these moving averages cross over each other.

When the 10-day moving average crosses above the 30-day moving average, this is a very bullish signal, especially to a stock like ESRX, which is trending higher. On the contrary, when the 10-day moving average crosses below the 30-day moving average, this would constitute a sell.

As you can see from the chart above, ESRX is now telling us that it’s time to go higher.

Here’s Our Next Move

As a seasoned trader, I always ask myself this question: What if I am wrong?

As an options trader, I can set myself up so that if that question becomes a statement, I have assumed the least amount of risk.

Based on the signals above, here is an example of trading ESRX with much lower cost and risk.

The case study above involves buying the ESRX August 85 call. This means that we have the right to purchase ESRX at 85 per share between now and August 21, 2015. Recent prices show the calls trading at 5.45, or $545 per contract. Much less than the $8,500 it would take to buy 100 shares of ESRX stock.

And what about risk?

The risk chart below shows that the worst case for the stock is that it takes the express route south. The $5.45 options could go to $0.00, giving the trader a $545 per contract loss on the position.

The good news is that your downside is limited, no matter how much ESRX should drop.

However if ESRX were to move to $92 a share, what would the $85 calls be worth?

It’s anyone’s guess, but the minimum value of these options is simple to figure out.

Take the stock price, and subtract the strike price to get the real value of the option.

In this case, $92-$85 = $7. Buying the calls for $5.45 and selling them for $7.00 would hand the trader a profit of $1.55, or a 30% return on the option.

Looking for a 30% return?

Perhaps taking the Express Route will do it!

Until next time…

Tom Gentile

America’s #1 Trader

4 Responses to “Taking the Express Route to Profit”

  1. Dennis Wilson

    That is one beautiful stock chart. Reading the candles back five years and it is replete with swing trade after swing trade opportunity and with no downturn for ten years or more. I know this is only a case study rather than an options trade instruction but, with some further study this has to be about the perfect stock to work for a while.
    Thank You for finding this one!
    Best Regards;

  2. Chris Armitage

    Hello Tom, I was just looking at this trade and wondering if it is still worth it? I see that the strike prices are $2 higher right now for the $85 Aug 21 Call? Break even would be around $92.65 I believe, do you believe this will still put us in the money?

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