Despite elevated trade tensions with China (see below), positive sentiment is being seen from a strong second-quarter earnings season. The S&P 500 now stands less than half a percent off the record 2,872.87 seen in January, reassuring investors who have worried in recent months that almost a decade of gains on Wall Street might be ending. 79% of S&P 500 companies have also topped estimates in Q2, and if the beat rate holds, it will be the highest on record – dating back to the first quarter of 1994.

*Source:  Seeking Alpha

Let’s consider Constellation Brands. (Ticker: STZ):

The VantagePoint platform recently indicated upside momentum.

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 on August 6th.  We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN a day before.  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. We also have the predicted high and low above yesterday’s actual high and low indicating further strength.  We also see that all three predictive differences are positively sloped and all three almost above the zero line which indicates further positive momentum.  I want to play the VP bullish 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 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 STZ, that yields a target strike of ~$222.50.  You may want to consider the STZ August 24th weekly expiration 220/22.5 call spread, buying it for $0.50.  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 = $0.50 and max reward = $2.00.  This means that you are getting odds of 4.0:1!

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

Mike Shorr
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 ProperTradingAcademy.