Eaton: A Premium Trade Idea

Premium Thoughts at the end in Bold.
Eaton, (ETN), has been in my watchlist many times over the past few years. And it is not because it is a local company. Since the 2009 low it made a $30 move into 2011 before consolidating in a symmetrical triangle. After breaking that triangle it would now appear to be in limbo from a trading perspective. The target on the triangle break (orange) has been exceeded at 73.30 and the Measured Move higher from the leg into the triangle has a target nearby overhead at at 80. If you have been rising this higher than congratulations! If not, then is the last $3.50 worth it? There are many ways to

answer this question. First, is to understand that the technical targets are not brick walls. They are guides and can act like a wall or be totally ignored by price. So 80 may not be the final top. Second, if you are a trend trader then maybe you can enter now with a trailing stop, limiting your downside risk and just seeing how far it will go. As an options trade the potential of $3.50 on a $76.50 stock is nice, but I would like more. Let’s dig into the daily chart and the options to see what might be there for the taking. The chart below keeps the notations from the weekly chart but now focuses on the short term. And lo and behold it seems to look attractive too. The move higher (purple line) stalled at 77 and after a slight pullback it is back at

that 77 level, resistance. A move above confirms a target of 80 in the short term too. The move on the first leg took two weeks and the second one has just begun so let's give it two weeks as well, or about to January 31. This keeps it within the move prior to the earnings release on February 4. The stock has weekly options so we can look to design trade to capture that upside quickly. The options show that you can purchase a January 31 Expiry Call with a 77 Strike for 95 cents near the close Thursday. That alone would give a possible 3:1 reward to risk ratio for the projected move. That is not bad.

Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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