More trade war rhetoric has shaken the markets overnight. The two major Chinese exchanges are down 3.8% and 5.8% as of this writing. This is after President Trump asked the U.S. Trade Representative to identify $200B worth of Chinese products that could be subject to an additional 10% tariff. “The U.S. has initiated a trade war,” China’s Commerce Ministry declared, adding that it will respond with “comprehensive quantitative and qualitative measures and retaliate forcefully.
Let’s consider D.R Horton (ticker: DHI)
If one was strictly a stock trader, selling (shorting) DHI in the $42.00 area could be prudent. You are anticipating a move to the downside. As a protective measure, it is always good practice to place a buy-stop order. In this case, placing that order in the $43.25 area will mitigate potential losses.
For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking a passive, premium credit approach may be the best path to success.
Because of the reasons given above, the sale of a credit call spread may be one way to approach this situation. You want to collect the most premium you can for as little time as you can while staying within one’s risk tolerances. You may want to consider the DHI June 29th weekly expiration 43/44 call spread, selling it for $0.30. The most you can profit is the credit received and the most you risk is the width of the spread less any premium collected. Ma reward = $0.30 and max risk = $0.70. This means that you are laying 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.