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International Crises Could Provide Short Term Trading Opportunities

International Crises Could Provide Short Term Trading Opportunities


Considering the news, it appears that the global situation could be defined with just one word. The word “crisis” seems to explain much of the news.

That was the theme of comments J.P. Morgan Chase CEO Jamie Dimon made in a conference call with analysts after the bank released earnings.

“The economy is still very strong, and that’s across wages, job creation, capital expenditure, consumer credit; it’s pretty broad-based and it’s not going to be diminished immediately. I was pointing out the probabilities that I thought were higher that rates would go up.

I still believe that. I do think you’re going to see higher rates.” And, Dimon added:

“If rates go up because you have inflation, that is not a plus. That is a bad thing,” Dimon said. “So far, we still have a strong economy in spite of these increasing overseas geopolitical issues bursting all over the place.”

When asked to name these issues, Dimon rattled off a list that included the Trump administration’s trade dispute with China, Brexit, the unwinding of bond-purchasing programs by central banks around the world, as well as flareups across Europe, the Middle East and Latin America including in Italy and Turkey.

“It’s an extensive list of stuff,” Dimon said, adding that most of the times, it’s rising rates and not geopolitical issues that ends up derailing economic cycles. “I’m just pointing that out. No one should be surprised if it happens down the road.”

Spotting Opportunities in the Crisis

The list of problems could provide a list of investment opportunities traders should monitor. Among those is the banks in countries experiencing turmoil. Analysts looked at one country and summarized the situation quickly:

“An economy in recession. Pesos fleeing the country. The worst drought in decades. The world’s highest interest rates. The biggest bailout in the history of the International Monetary Fund.

Sound Scary?

For Argentina, it’s more of the same, as it has suffered through many economic crises in recent decades.

And pretty much every time, the catastrophic meltdowns ended with some combination of unsustainable national debt, high unemployment, rising poverty rates, looting, bank runs, capital flight and hyperinflation.”

Looking at financial services companies in the country, there is one that stands out, Grupo Financiero Galicia S.A. (Nasdaq: GGAL), a financial services holding company, that provides various financial products and services in Argentina.

The stock has been in a persistent downtrend.

GGAL weekly chart

But, a recent spike created volatility and an opportunity for potential profits.

GGAL daily chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying GGAL 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 GGAL

For GGAL, the November 16 options allow a trader to gain exposure to the stock.

A November 16 $30 call option can be bought for about $1.00 and the November 16 $35 call could be sold for about $0.40. This trade would cost $0.60 to open, or $60 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 $60.

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 GGAL the maximum gain is $4.40 ($35 – $30 = $5.00; $5.00 – $0.60 = $4.40). This represents $440 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $60 to open this trade.

That is a potential gain of about 733% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.