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China Trade Deal Could Deliver Triple Digit Gains In This Company

China Trade Deal Could Deliver Triple Digit Gains In This Company

In assessing international news, it can be useful to look at news sites outside the U. S. In the trade war with China, the South China Morning post has offered valuable insights. A recent report noted,

“US business executives say a broad outline of the phase one trade deal with China coming into focus includes some advances in intellectual property protection, big-ticket farm purchases and a reduction in barriers to exports.

“The agreement seems modest but nonetheless directionally helpful,” said a trade consultant briefed on aspects of the agreement. “The best thing still is that we have a path toward not accelerating tariffs further this year.”

Executives cautioned that they had not seen the text of the agreement although they had been briefed in some detail by government and White House officials.

“For the first time, we have something to applaud in the US-China relationship,” said one executive briefed by Trump administration officials. He and others declined to be identified over concerns it could hurt their standing with the administration.”

This should lead to trading opportunities as Benzinga reported,

“If the signing of the phase one trade deal with China is the “mother of all catalysts” for U.S. stocks, then Tyson Foods, Inc. (NYSE: TSN) could be “the biggest” winner, according to CNBC’s Jim Cramer.

Tyson’s China Catalyst

China continues to deal with an African swine fever epidemic, which is resulting in a major shortage of pork in the country, Cramer said Thursday on “Mad Money.”

Pork is a national staple in China, and the country needs to look outside its borders for a fresh supply of pork products, he said.

Tyson Foods is the largest meat processor in the U.S., and the Chinese market represents a major catalyst for the company, the CNBC host said, adding that the opportunity comes at a time when investors are looking for “companies with powerful catalysts.”

Tyson Shares ‘Darned Cheap,’ Cramer Says

Tyson Foods’ stock ended 2019 with strong gains, yet the company’s China opportunity makes the stock look attractive at current levels, Cramer said. The stock is trading at just 12 times next year’s estimates, which is “darned cheap” and implies Tyson has “a lot more room to run,” he said.

Wall Street analysts could soon recognize Tyson Foods’ outlook is underappreciated and scramble to move their earnings estimates higher, Cramer said. The basic math implies the stock is “going to look even cheaper” than it does today, he said.“

The stock is near resistance on the daily chart and a sharp break out is possible.

TSN daily chart

The weekly chart shows the relatively brief consolidation that followed an up trend could be considered a bullish cup with saucer pattern.

TSN weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying TSN could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for TSN

 Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For TSN, the February 21 options allow a trader to gain exposure to the stock.

A February 21 $92.50 call option can be bought for about $3.10 and the February 21 $95 call could be sold for about $2.01. This trade would cost $1.09 to open, or $109 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $109.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in TSN the maximum gain is $1.41 ($95 – $92.50= $2.50; $2.50 – $1.09 = $1.41). This represents $141 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $109 to open this trade.

That is a potential gain of about 129% in TSN based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.