Looking For A Gap In GPS

Watch for further action in financial stocks as investor digest the Fed’s interest hike announced on Wednesday. Its accompanying statement removed the language that the policy remains “accommodative.” Fed Chair Jerome Powell explains that the phrase’s “useful life was over.” Regarding trade, the Fed doesn’t see much effect from tariffs in economic data yet. The end result of the trade actions is what’s important, Powell says. “In the end, if the place we get to is lower tariffs, that’s good,” he says. Dow futures are down 0.1%, S&P futures are barely down at 2,910, Nasdaq futures slightly up at 7,596.

*Source:  Seeking Alpha

Let’s consider Gap Inc. (Ticker: GPS):

The VantagePoint platform recently indicated continuing upside momentum.

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 on September 25th.  We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN on September 19th.  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. We also have the predicted high and low above yesterday’s actual high and low indicating further strength.  I want to play the VP bullish indication.

Strategy Discussion

If you are strictly a stock trader, simply buying GPS in the $28.50 area is a prudent move.  You are anticipating a move to the upside.  It is always a good idea to enter a sell-stop order to mitigate potential losses.  Placing that sell-stop in the $27.50 area will achieve that goal.

For 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.  You will first want to calculate your target strike.  In order to do this, you will need three pieces of data:  current price, expiration date and the implied volatility associated with that expiration date.  For GPS, that yields a targeted strike of ~$30.50.  You may want to consider the GPS October 19th regular monthly expiration 29/30.5 call spread, buying it for $0.40.  The most you can lose is the premium paid and the most you can gain is the width of the wider spread less any premium paid.  Max risk = $0.40 and max reward = $1.10

This means that you are getting odds of 2.75:1.

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 Review

You will recall that we highlighted bullish momentum in ConocoPhillips (Ticker: COP).  We showed how buying the October 19th 77.5/80 call spread for $0.50 could take advantage of this bullish momentum.  We showed how the VP charts were showing continued bullishness and we were holding the position.  We exited on September 24th.  Here was the chart that day:

We exited the position for $1.00 which allowed us to realize a ROI of 100%!