The rapprochement between President Trump and Xi Jinping fired up markets on Monday, but skepticism crept into investing sentiment overnight, weighing on equity markets. None of the commitments that U.S. officials said had been given by China were agreed to in writing, while there was initial confusion on when the three-month negotiating window would start. Meanwhile, the curve between the U.S. three-year and five-year and between two-year and five-year paper inverted on Monday for the first time since the financial crisis, and analysts expect the two-year, 10-year yield curve – seen as a predictor of a U.S. recession – to follow suit.
*Source: Seeking Alpha
Let’s consider Oracle Corporation (Ticker: ORCL):
If you are strictly a stock trader, simply buying ORCL in the $49.25 area is a prudent move. You are anticipating a move to the upside. It is always a good idea to enter a sell-stop order to mitigate potential losses. Placing that sell-stop in the $48.00 area will achieve that goal.
For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.
Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation. You will first want to calculate your target strike. In order to do this, you will need three pieces of data: current price, expiration date and the implied volatility associated with that expiration date. For ORCL, that yields a targeted strike of ~$51.00. You may want to consider the ORCL Decembe4 14th weekly expiration 50/51 call spread, buying it for $0.30. The most you can lose is the premium paid and the most you can gain is the width of the spread less any premium paid. Max risk = $0.30 and max reward = 0.70. This means that you are getting odds of 2.33:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.