U.S. stock index futures are following Asia and Europe into the red as risk-off sentiment pervades amid increasing tensions between Riyadh and Washington. The Kingdom has vowed an economic response “with greater action,” should the U.S. impose sanctions against Saudi Arabia over the Khashoggi case. Crude warning? “If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure,” Al Arabiya‘s Turki Aldakhil wrote in an op-ed.
Let’s consider Bunge Ltd. (Ticker: BG):
This is a classic set up for one of my favorite technical triggers, the Inside Bar (IB). An inside bar is formed when the high and low from yesterday’s bar is “inside” that of the day before. That is the set up we have here in BG. For the IB to trigger, we have to have today’s price print 1% above the high from yesterday. That happened today when BG printed 68.25. Time to get long.
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. The first thing that you want to do is calculate your target price. In order to perform this calculation, you need three pieces of information: current price, expiration date and the implied volatility for that expiration date. For BG this calculation yields a target strike of ~$75.00. You may want to consider the BG November 16th regular expiration 70/75 call spread, buying it for $1.15. The most you lose is the premium paid and the most you can gain is the width of the spread less any premium paid. Max risk = $1.15 and max reward = $3.85. This means that you are getting odds of 3.35:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.