Market watchers are steeling for Tuesday trade after U.S. stocks started off the second quarter with considerable and broad-based losses. S&P futures were recently ticking slightly higher after Monday’s tumble to the index’s lowest level since mid-November and a close below its 200-day simple moving average (2,589.00) for the first time since June 2016. With the right set up, I think it might be an opportune time to dip into some of these names from the long side. Thank goodness I have the VP platform. Let’s consider American Outdoor Brands (Nasdaq: AOBC). American Outdoor Brands Corporation is an American manufacturer of firearms and outdoor sports and recreation products. It owns 18 brands. Its principal brand is Smith & Wesson firearms. Let’s take a look at the chart:
The VantagePoint platform recently indicated a potential upside breakout in AOBC could be forming due to a bullish crossover from 3/27/18 to 3/28/18.
Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out two significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing below the black, simple moving average from 3/27/18 to 3/28/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position the trading period before. This indicator measures strength and weakness for a 48-hour period. In this case strength. The move to the GREEN position further makes the case for a potential bullish scenario. That’s why one could consider entertaining a setup to the upside.
If one were a straight stock trader, simply buying AOBC in the $10.75 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter AOBC without the limitation of time associated with other strategies. In this scenario, it would also be good practice to place a sell-stop order in the $10.00 area to mitigate potential losses.
For more 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 determine is your target price. You need three pieces of information to complete this calculation: current price, expiration date and at-the-money volatility for that timeframe. This calculation yields a target price of approximately $12.00. One could consider the potential opportunity of the April 20th monthly expiration 11/12 call vertical paying $0.35. This has a maximum risk of what you paid for the spread, or $0.35. The maximum reward is the width of the spread less any premium paid or $1.00 – $0.35 = $0.65. This gives us a reward to risk ratio of 1.86:1. This r/r ratio is a bit less than normal, but we must take into account the low price of the stock and that we are being very conservative with our target price.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.