October 11, 2018

Mosiac May Break Into A Million Little Pieces

A mix of higher bond yields and growth worries are continuing to take their toll on the markets, with equities across Asia and Europe getting slammed overnight after a bloodbath in the U.S. Led by tech carnage, the S&P 500 and the Dow posted their biggest daily declines since Feb. 8, while the CBOE Volatility Index (VIX) surged 43.9% to 22.96. Adding to the worries were several statements from President Trump that referenced a long-awaited “correction” and said that the “Fed is going loco” by raising rates.

*Source:  Seeking Alpha

Let’s consider Mosaic Company (Ticker: MOS):

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 October 8th.  We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED 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.

Strategy Discussion

If you are strictly a stock trader, simply Selling MOS in the $32.65 area is a prudent move.  You are anticipating a move to the downside.  It is always a good idea to enter a buy-stop order to mitigate potential losses.  Placing that buy-stop in the $33.75 area will achieve that goal.

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 MOS, that yields a targeted strike of ~$30.50.  You may want to consider the MOS November 2nd weekly expiration 30.5/32 put spread, buying it for $0.35.  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 = $0.35 and max reward = $1.15

This means that you are getting odds of 3.29:1.

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

Position Update

You may recall our position we highlighted in Broadcom (Ticker:  AVGO) on October 9th.  Here’s what the chart looks like today:

We sold the AVGO October 12th weekly expiration 245/247.5 call spread for $1.00.  The very next day, we could not resist taking the spread off, paying $0.45 and realizing an ROI of ~37% in just a few trading hours.

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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