Government borrowing costs are continuing to grind upwards. The 10-year Treasury yield has broken through 3.1% – its highest level since July 2011 – as higher oil prices point to increased inflation following yesterday’s upbeat U.S. retail sales numbers. Economic figures today – like jobless claims – could boost yields further as market players become even more confident about upcoming Fed rate hikes.
*Source: Seeking Alpha
The early trade markets are essentially unchanged. I am still willing to consider strong indications of bullish momentum.
We turn to Southwest Airlines today (ticker: LUV):
The VantagePoint platform recently indicated a potential upside breakout in LUV could be forming due to a bullish crossover between 5/15/18 and 5/16/18.
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 5/15/18 and 5/16/18. 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 LUV in the $53.00 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter LUV 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 $52.00 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 LUV, this calculation targets the $55.5 strike. You may want to consider buying the June 1st weekly expiration 54.5/55.5 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.
Earlier in the week we identified a potential bullish opportunity in Target (ticker: TGT). Specifically, we highlighted purchasing the June 1st weekly expiration 76.5/77.5 call spread paying $0.25. Perhaps in a sympathetic move with the Macy’s earnings release, TGT rallied at one point over 3%. Take a look at today’s chart:
Following prudent risk management protocols, we exited the spread for $0.45 realizing a ROI of 60%. If one were more aggressive with their risk management, all signs from the VP platform are still showing a potential strong bullish momentum.