For this week’s setup, I am returning to a classic entry technique detailed in my book, ” Mean Reversion Trading .” The subject is Dell Technologies (DELL) , a stock that has been locked in a grind for months, trading within a relatively tight range of approximately +/- $25. While this lack of momentum often kills the profitability of naked calls or puts, it creates a perfect environment for vertical spreads. This strategy shines here because it doesn’t require a massive breakout to be profitable; it can generate a 100% ROI on a move as small as a single dollar. To pinpoint the entry, I am relying on a confluence of three technical signals: RSI (Relative Strength Index): The RSI is flashing a subtle but critical signal. While the reversal isn’t screaming just yet, the metric has been steadily climbing since January 8. This momentum shift is occurring right as the stock tests a major support area, adding weight to the bullish thesis. Support/Resistance: Even if we strip away the technical indicators, the price action tells a clear story. The $115 level has established itself as legitimate long-term support. The stock’s distinct bounce from this zone just last week confirms that buyers are actively stepping in to defend this territory. Directional Movement Index (DMI): Finally, to gauge the strength of this potential reversal, I look to the DMI. We are seeing the early stages of a shift, with the directional lines beginning to pivot and change course. This “curling” action is often the precursor to a broader trend change, signaling that the sellers are losing their grip. The trade setup: DELL 120-121 bull call spread Given Dell’s tendency to trade within a defined range, we don’t need to hunt for a massive breakout to find profitability. Instead, we can utilize a bull call spread to turn this modest volatility into a powerful advantage. This structure is designed to literally double our capital if the stock simply reclaims the $121 level by expiration. The scalability here is excellent as well; a 50-contract position, for example, puts $2,500 at risk to generate $2,500 in profit, offering a symmetric 100% return on a setup that requires very little movement from the underlying stock. Here’s the trade I’d consider: Buy $120 call, Feb. 6 expiry Sell $121 call, Feb. 6 expiry Cost: $50 Potential Profit: $50 -Nishant Pant Founder: https://tradewithmaya.com/ 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, or its 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.
