The volatile stock market will see a major test in the coming weeks as traders size up first-quarter results. Tax cuts should help Corporate America post its biggest quarterly profit growth in seven years, with S&P 500 profits expected to rise 18.4%, but any disappointments could further upset investor sentiment.
President Trump backed off of his comments regarding potentially launching missiles into Syria which would have a profound effect on the area as well as riling up Syria’s ally Russia. The market was not looking too kindly at fighting a proxy war in the Middle East again. With those fears largely in the rearview mirror, we can begin to look at some bullish plays again. Today we consider Skyworks (SWKS):
The VantagePoint platform recently indicated a potential upside breakout in SWKS could be forming due to a bullish crossover between 4/10/18 and 4/11/18.
Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out four significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average between 4/10/18 and 4/11/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position one day earlier from 4/9/18 to 4/10/18. 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 SWKS in the $98.50 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter SWKS 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 $97.75 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. First order of business is to determine your target strike. This will serve as the short leg of our debit put spread. We need three pieces of information to perform this calculation: current price, date of expiration and ATM implied volatility. In this case, SWKS yields a target strike of ~$104. You can consider the SWKS April 20th 102/104 call spread paying $0.50. The maximum risk of this spread is the amount of premium you paid and the maximum reward is the width of this spread less the premium paid. Max risk = $0.50, max reward = $1.50 which gives us 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.
Earlier in the week we highlighted a possible bearish opportunity in Nike, Inc. (NKE). We demonstrated how purchasing the April 64.5/66 put spread for 0.35 could be a way to take advantage of this bearish momentum. Here is the chart today:
The chart is continuing to show bearish strength. But, this is a short term holding and NKE put in new highs above today’s predicted high. We entered the spread for $0.35 and today we exited the spread at $0.24. This is an example of conservative risk management for a signal that was not working out for us. This allowed us to free up capital and focus to find and act on other opportunities. That is crucial for short term options trading.