The countdown until Brexit Day has begun, with only a year until the U.K. leaves the EU on March 29, 2019. European leaders have agreed to a transition deal, which extends Britain’s de-facto membership until the end of 2020, but there are still several outstanding difficulties. Those include how the U.K. can leave the single market and customs union, but maintain full economic access, frictionless trade and no physical border in Ireland.
The market has no idea what it wants to do, so I am going to keep a careful balance to my trading portfolio. With a bearish signal already on the books, I am looking for something to the upside. Thank goodness I have the VP platform. Let’s consider Hawaiian Holdings (HA):
The VantagePoint platform recently indicated a potential upside breakout in HA could be forming due to a bullish crossover from 3/23/18 to 3/26/18.
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 below the black, simple moving average from 3/23/18 to 3/26/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position that trading day 3/23/18. 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. That’s why one could consider entertaining a setup to the upside.
If one were a straight stock trader, simply buying HA in the $39.00 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter HA 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 $36.500 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 $42.50. One could consider the potential opportunity of the April 20th monthly expiration 40/42 call vertical paying $0.55. This has a maximum risk of what you paid for the spread, or $0.55. The maximum reward is the width of the spread less any premium paid or $2.00 – $0.55 = $1.45. This gives us a reward to risk ratio of 2.64:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.