As the S&P 500 closed in the red for three-quarters of October’s trading sessions so far, the current narrative has been bleak: Q3 earnings season is a flop for markets. Reports from General Electric (NYSE:GE) and Facebook (NASDAQ:FB) today will kick off the last big week for quarterly results, though U.S. stock index futures are still weary after the S&P 500 closed yesterday in correction territory. With profits still set to rise by more than 20% for the third straight quarter, could equities get a much-needed lift?
*Source: Seeking Alpha
Let’s consider Colgate-Palmolive Company (Ticker: CL):
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 October 25th. We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED position on that 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.
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. 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 CL, that yields a targeted strike of ~$57. You may want to consider the CL November 16th regular monthly expiration 57/58.5 put spread, buying it for $0.40. The most you can lose is the premium paid and the most you can gain is the width of the wider spread less any premium paid. Max risk = $0.40 and max reward = $1.10. This means that you are getting odds of 2.75:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.
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