CHINA COMEBACK… AGAIN
New Trade Alert for Tencent
Buy TME April $10 Call @$2.25 or less
Risk Rating: 3 (1 = lowest 5 = highest)
Above Break Even Probability: 39%
U.S. stocks are up 25% in 2019 after trade war troubles last December. The full “V” recovery targets S&P 3500 up above.
The psychology, sentiment and selloff all have participants extremely negative on China. A one sided oversold market is ripe for a bullish bounce.
Tencent had dropped 40% from $19 March highs and is down for the year compared to the FXI China Index positive in 2019.
TME has been between mostly $12 and $16 for many months.
Watch for a rebound back $12 SUPER SUPPORT.
The Options Way: Unlimited Upside Potential with Limited Risk.
An TME long call option can provide the staying power in a potential larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Just sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success.
Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With TME trading at $11.60, for example, an In The Money $10 strike option currently has $1.60 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the TME April $10 Call at $2.25 or less.
This option strike gives you the right to buy the shares at $10 per share with absolutely limited risk.
The April option has four months for BULLISH development. A near 75 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $225 or less paid per option contract. The upside, on the other hand, is unlimited.
The TME option trade break-even is $12.25 at expiration ($10 strike plus $2.25 or less option premium). That is just 75 cents above the current TME price.
The top of the channel target stands above at $16. At that level the option investment would gain 166% to $6.00.