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I’ve said before that October is usually one of the best times to buy stocks. Stocks tend to rebound from oversold conditions through the end of the year, but I think the latest bounce may have gone too far too soon.
The stock I’m looking at today is a perfect example. Harley-Davidson, Inc. (NYSE:HOG) rebounded from oversold levels over the last few trading days. The stock was hit hard by the correction in October, but this bullish move is over done for a few reasons.
HOG was an early target when the trade war with China began. Some people are optimistic about the situation after Treasury Secretary Steve Mnuchin spoke to top Chinese officials about trade this week.
But the U.S. wants China to make an offer before discussions fully resume. China wants discussions to resume before making any formal proposals. The two countries are at an impasse.
Even with President Trump and President Xi set to meet at the G20 summit in Argentina, I think the trade situation is going to take a long time to resolve. China is willing to let its market go lower, and it won’t back down.
Daily Chart of Harley-Davidson, Inc. (HOG) — Chart Source: TradingView
From a technical perspective, the stock tapped its 50-day moving average yesterday before closing at $41.60. That moving average should act as resistance going forward, and I am betting on a move to the downside.
Using a spread order, buy to open the HOG Dec. 21st $40 put and sell to open the HOG Dec. 21st $37.50 put for a net debit of about $0.45.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.