Last week I focused on renewed tensions between the U.S. and China over Hong Kong’s special status, but I said my indicators were giving bullish signals. I picked a bearish trade as a way to take advantage of the issues overseas, but this week, I am recommending a bullish position on a stock that recently formed some support: Raytheon Technologies Corporation (NYSE:RTX), the aerospace company.
A Less Severe Pullback in the Market
I’m no longer expecting a retest of the lows, but I wouldn’t be surprised to see a pullback in the near term.
I think that’s even more likely because President Trump has ramped up the rhetoric against China again, which will only bring more uncertainty to the markets.
That’s the last thing investors want right now, especially with the S&P 500 Volatility Index (VIX) sitting at such a critical support level.
Daily Chart of S&P 500 Volatility Index (VIX) — Chart Source: TradingView
As you can see in the daily chart above, the VIX has been testing support in the 26-27.50 range for the past few weeks. Normally, I would expect this level to be broken to the downside, which would be a positive for the market (remember that the VIX usually trades in the opposite direction of the S&P).
The ongoing uncertainty around U.S.-China relations increases the chances the VIX’s support will hold.
But I still do not plan to fight the Federal Reserve. As I mentioned on Friday, as of May 27, the Fed’s balance sheet has increased to nearly $7.1 trillion. That’s an unfathomable figure and one that the bears on Wall Street cannot compete with.
If we need to put a bullish trade on to take advantage, RTX is an excellent choice. While it’s an aerospace company, RTX is also extremely important to the U.S. military, which is unlikely to cut its spending anytime soon.
And RTX’s technical picture makes an even better case for a bullish put write position.
As I mentioned above, I don’t expect another pullback to be too severe, and I think RTX is unlikely to drop too far. In the chart below, you can see that the stock’s recent low is around $52.
Daily Chart of the Raytheon Technologies Corporation (RTX) — Chart Source: TradingView
Because volatility is still elevated, traders are willing to pay more for far out-of-the-money options. That means we can sell an option with a strike price far below RTX’s current price. If we place that strike below support at $52, we increase our odds of walking away with full profits.
Sell to open the RTX June 26th $51 put at about $0.30.
Note: Be sure you are opening the weekly RTX options that expire on Friday, June 26, 2020.
This is a high-risk trade, so take a small position.
About Naked Put Writes
A naked put write is a bullish position in which you expect the price of the underlying stock to increase.
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