Prosper Trading Academy’s Short-Term Options Instructor, Mike Shorr, was active in the signal room today. Among other names that he considered, Hess Corp. stuck out because despite the broad market indexes being down throughout the day, HES stood its ground. Let take a look at what he observed:
Equity markets are under pressure amid news that President Trump will sign a memorandum this afternoon “targeting China’s economic aggression.” Tariffs on Chinese imports worth as much as up to $60B could be unveiled, stoking fears of a global trade war.
The broad markets were trading down about 1.5% across the board in mid-day trading. Hess Corp. is down only about 1/3%. This relative strength makes a bullish indication even more enticing.
Here is the chart for Hess Corp. (NYSE: HES):
The VantagePoint platform recently indicated a potential upside breakout in HES could be forming due to a bullish crossover between 3/20/18 and 3/21/18.
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 above the black simple moving average between 3/20/18 and 3/21/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position a day earlier from 3/19/18 to 3/20/18. 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. Additionally, we see that the predicted high and low for today’s range is above the actual high and low from yesterday’s session. That’s why one could consider entertaining a setup to the upside.
If one were a straight stock trader, simply buying HES in the $50.25 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter HES 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 $48.75 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 $52.50. One could consider the potential opportunity of the March 29th weekly expiration 51/52.5 call vertical paying $0.40. This has a maximum risk of what you paid for the spread, or $0.40. The maximum reward is the width of the spread less any premium paid or $1.50 – $0.40 = $1.10. This gives us a reward to risk ratio 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.