September 26, 2018

Let’s Get Things Squared Up

The Federal Open Market Committee is expected to lift the federal funds rate by a quarter point to 2.25% when the central bank finishes its two-day meeting today. The central bank is looking to guide the U.S. economy in for a soft landing, with an eye on the gap between the inflation rate and the fed funds rate. The so-called “neutral” federal funds rate (tossed around as R* by some economists) is either quite low or somewhat elevated by historical standards, depending upon which Fed governor you ask. Updated dot plot rate forecasts will be released after the meeting to give interest rate watchers plenty to chew on. Heading into the meeting, the 2-year Treasury is showing a 2.83% yield and the 10-year is at 3.08%.

*Source:  Seeking Alpha

Let’s consider Square Inc. (Ticker: SQ):

The VantagePoint platform recently indicated continuing 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 September 24th.  We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN on September 24th as well.  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.  Add to that, all three predictive differences are strongly positively sloped.  I want to play the VP continued 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 SQ, that yields a targeted strike of ~$105.00.  You may want to consider the SQ October 19th regular monthly expiration 100/105 call spread, buying it for $1.15.  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 = $1.15 and max reward = $3.85

This means that you are getting odds of 3.35:1.

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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