We have two familiar political forces rearing their heads again which are keeping a bit of a cap on the US equity markets. First there is China. “China opposes the abuse of national security clauses, which will seriously damage multilateral trade systems,” said Gao Feng, spokesman at the Ministry of Commerce, adding that it will “firmly defend” its rights and interests. These comments came in a response to the Trump administration launching an investigation into car and truck imports. That could result in tariffs akin to those levied on steel and aluminum. The second is North Korea. President Trump has canceled the June 12th summit. The markets initial reaction was bearish.
The early trade markets are down a bit, but I am still willing to consider strong indications of bullish momentum.
Let’s consider Micron Technology (ticker: MU today):
The VantagePoint platform recently indicated a potential upside breakout in MU could be forming due to a bullish crossover back between 5/4/18 and 5/7/18.
Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average between 5/4/18 and 5/7/18 and this bullish momentum is still very strong and even increasing. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position back on 5/18/18. 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. I want to play the VP bullish indication.
If one were a straight stock trader, simply buying MU in the $60.10 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter MU 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 $57.75 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 you want to do is calculate your target strike. In order to do this, you need three pieces of information: current price, date of expiration and at the money implied volatility for that expiration. For MU, this calculation targets the $64.00 strike. You may want to consider buying the June 8th weekly expiration 62.5/64 call spread paying $0.35. The maximum risk is what you paid for the spread and the maximum reward is the width of the spread less any premium paid. Max risk = $0.35, max reward = $1.15 which yield a reward to risk ratio of 3.29:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.
Position Update Discussion
You will recall earlier in the week, we identified bullish momentum in Netflix (ticker: NFLX). We highlighted that one way to take advantage of this momentum was to enter into the June 1st weekly expiration 340/345 call spread paying $1.20 when NFLX was trading $332.40. The maximum risk is what you paid for the spread and the maximum reward is the width of the spread less any premium paid. Max risk = $1.20, max reward = $3.80 which yield a reward to risk ratio of 3.16:1.
Here’s what NFLX looks like today:
Today NFLX is trading $349.30 and we exited our spread for $3.40. A staggering ROI of 183.33%!