The markets are solidly in a wait-and-sell mode as we await two key pieces of economic data:  Wednesday’s FOMC announcement and Friday’s Employment Situation report.  In the meantime, I am not convinced the market will make any sort of definitive moves until Friday so I am willing to take advantage of a slightly inflated VIX to collect some premium if the reward to risk lines up.

Let’s look at FedEx today (ticker:  FDX):

The VantagePoint platform recently indicated a potential downside breakout in FDX could be forming due to a bullish crossover between 4/27/18 and 4/30/18.

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 below the black simple moving average between 4/27/18 and 4/30/18. We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED position 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 potential bearish scenario. Additionally, we see that the predicted high and low for today’s range is below the actual high and low from yesterday’s session.  I want to play the VP bearish indication.

Strategy Discussion

If one were a straight stock trader, simply selling FDX in the $245.50.00 area could prove to be prudent. You are anticipating a move to the downside. It’s also a conservative way to enter FDX without the limitation of time associated with other strategies. In this scenario, it would also be good practice to place a buy-stop order in the $247.50 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 a passive, premium creit approach may be the best path to success.

Because of the reasons given above, the purchase of a credit call spread may be one way to approach this situation.  You want to collect as much premium as possible while adhering to your risk tolerances and protocols.  You can consider the FDX 247.50/250 May 4th weekly expiration call spread collecting $0.75.  The maximum reward of the spread is the amount of premium you collected and the maximum risk is the width of this spread, less the premium collected.  Max risk = $2.50 – $0.75 = $1.75, max reward = $0.75 which gives us a risk to reward ratio 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.

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.