December 6, 2018

American Airlines Seems To Have Been Grounded

It’s another dark day for stocks across the globe as Canadian officials arrested Huawei CFO Meng Wanzhou for allegedly violating U.S. sanctions with Iran. Meng, who is also the daughter of the company’s founder, may now face extradition to the U.S.; a hearing is set for Friday. The news raises fresh doubts over a 90-day trade truce struck between President Trump and Xi Jinping, feeding fears of a fresh flare-up in tensions between the world’s two largest economies.

*Source:  Seeking Alpha

Let’s consider American Airlines Group Inc. (Ticker: AAL):

The VantagePoint platform recently indicated downside 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 bearish crossover indicated by the blue predictive indicator line crossing below the black simple moving average on December 4th.  We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED position on the same day.  This indicator measures strength and weakness for a 48-hour period, in this case, weakness.  The move to the RED position further makes the case for a potentially bearish scenario. We also have the predicted high and low below yesterday’s actual high and low indicating further weakness.  I want to play the VP bearish indication.

Strategy Discussion

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 put spread may be one way to approach this situation.  First, you want to identify your target strike.  To do this, you need three pieces of information:  current underlying price, the date of the options expiration that you want to use and the implied volatility for that expiration.  For AAL that yields a target strike of approximately $33.50.  You can consider purchasing the December 21st regular monthly expiration 33.5/35 put spread for $0.30.  The most you risk is the premium you pay and the most you can gain is the width of the spread less any premium paid. Max risk = $0.30, max reward = $1.20.  The provides you with a reward to risk ratio of 4:1

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.

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/

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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