DailyPlay – Opening Trade (ETN) – August 13, 2024

ETN Bearish Opening Trade Signal

Investment Rationale

As enthusiasm for AI-related investments begins to cool, some sectors that benefited from the initial wave of optimism are starting to face increased scrutiny. Eaton Corp (ETN), a Bearish Trade Idea on OptionsPlay today is a key player in the utilities space that powers data centers, is now showing signs of vulnerability. The company’s valuation, coupled with a recent technical breakdown, raises concerns about its ability to maintain its upward trajectory. As investors reassess their positions in light of waning AI hype, ETN is at risk of further downside, making it a  candidate for a bearish trade.

Technical Analysis

Eaton Corp (ETN) has recently broken below a key support level at $300, signaling potential further downside as the stock struggles with relative underperformance against the S&P 500. The relative strength has deteriorated, and momentum have turned negative, suggesting that the selling pressure may continue.

ETN – Daily

Fundamental Analysis

ETN’s valuations appear stretched, particularly when compared to its industry peers. The stock is currently trading at 30x forward earnings which is well above the industry average of 25x. This premium valuation is difficult to justify given that Eaton’s future EPS growth of 13% and revenue growth of 8% are only marginally higher than the industry averages of 14% and 6%, respectively. Moreover, Eaton’s net margins of 15% are in line with the industry average of 14%, indicating that the company is not offering superior profitability that might warrant a higher multiple.

Trade Details

Strategy Details

Strategy: Short Call Vertical Spread

Direction: Bearish Credit Spread

Details: Sell to Open 2 ETN Sept 20th $290/$310 Call Vertical Spreads $7.95 Credit per Contract.

Total Risk: This trade has a max risk of $2,410 (2 Contracts x $1,205) based on a hypothetical $100,000 portfolio risking 2%. We suggest using 2% of your portfolio value and divide it by $1,205 to select the # contracts for your portfolio.

Trend Continuation Signal: This is a bearish trade on a stock that is expected to continue its bearish trend.

1M/6M Trends: Bearish/ Mildly Bearish

Relative Strength: 5/10

OptionsPlay Score: 105

Stop Loss: @ $15.90 Debit (100% loss to the value of premium)

View ETN Trade

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that whenever there is a multi-leg option strategy, it should be entered as a single trade. 

PLEASE NOTE that these prices are based on Monday’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

View ETN Trade