It’s data deluge day in London. In addition to a press conference from Mark Carney, the Bank of England will release its monetary policy decision, the minutes from its last meeting and a quarterly inflation report. Until a few weeks ago, a 25 basis point rate hike was anticipated with near certainty, but dovish comments from Carney have dashed those expectations, along with a softer GDP print and weakening pound.
*Source: Seeking Alpha
That most likely means a continued strong dollar and that means risk on for US Equities.
Let’s look at MGM Resorts International today (ticker: MGM):
The VantagePoint platform recently indicated a potential upside breakout in MGM could be forming due to a bullish crossover between 5/8/18 and 5/9/18.
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 5/8/18 and 5/9/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position that same day. 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 MGM in the $33.00 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter MGM 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 $31.00 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 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 MGM, this calculation targets the $35.00 strike. You may want to consider buying the May 18th regular expiration 34/35 call spread paying $0.25. 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 = $0.25, max reward = $0.75 which yield a reward to risk ratio of 3:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.
You will recall that we showed how one could play the bullish momentum identified by the VP platform on 5/8 in Broadcom (ticker: AVGO). This is what the chart looked like on that day:
We showed how you could have considered buying the AVGO May 242.5/245 call spread for $0.65. The maximum risk of the spread is the amount of premium you paid and the maximum reward is the width of this spread, less the premium paid. Max risk = $0.65, max reward $1.85 which gave us a reward to risk ratio of 2.84:1. Here’s the chart today:
As you can see, the VP platform worked to perfection. We sold this spread for $1.10 to realize a return on investment of 69.2%!