November 8, 2018

AEP Is Showing Stability In This Turbulent Market

The Fed is likely to leave rates unchanged this afternoon as it announces its decision following a two-day policy meeting. U.S. stock index futures are still giving back some of yesterday’s gains as traders get nervous about upcoming tightening in December. Recent reports showing strong job and economic growth give the FOMC little reason to materially change its statement, while recent stock weakness doesn’t appear large enough to warrant extra attention from the central bank.

*Source:  Seeking Alpha

Let’s consider American Electric Power Company (Ticker: AEP):

The VantagePoint platform recently indicated continued 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 November 6th.  We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position on 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 potentially bullish scenario. We also have the predicted high and low above yesterday’s actual high and low indicating further weakness.  I want to play the VP bullish indication.

Strategy Discussion

If you are strictly a stock trader, simply buying AEP in the $75.00 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 $73.50 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 AEP, that yields a targeted strike of ~$77.50.  You may want to consider the AEP December 21st regular monthly expiration 75/77.5 call spread, buying it for $0.75.  The most you can lose is the premium paid and the most you can gain is the width of the spread less any premium paid.  Max risk = $0.75 and max reward = $1.75.  This means that you are getting odds of 2.33:1.

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 Update

If you recall, we identified a bullish indication of momentum earlier this week in Honeywell (Ticker: HON).  The opportunity could be taken advantage of by putting on the HON November 23rd weekly expiration 152.5/155 call spread, paying $0.50.  Here’s the chart today:

The platform has performed well and we continue to hold this position with a profit target of $0.75 which would allow us to realize an ROI of 50%.

If you would like to learn more about the VantagePoint platform and take advantage of the exclusive offer that our clients enjoy, please visit:

https://discover.vantagepointsoftware.com/prosper-demo/

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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