Betting on a Trade Resolution

Yesterday the Chinese Vice Premier Liu He announced that a "New consensus" had been reached in trade negotiations with the US. The ongoing trade disputes since the start of the Trump presidency have made headlines for various reasons from tariffs on products, stemming the theft of US intellectual property, cracking down on counterfeiting and the stockpiling of agricultural products since farmers have been hurt by export policy to China. Considering that President Trump is fixated on the performance of the stock market, it's very likely that the trade disputes are coming close to an end with China. Both US and foreign companies and employees of those companies would like to see a fair resolution that allows commerce on a level playing field without collateral damage to individual players.

Harley Davidson was kicked from White House fanboy status to the doghouse when they were called out for manufacturing overseas as a result of tariffs with the EU and Asia. Trade risks and retaliation has punished the stock from a 52 week high of $46.79 to a low of $31.36 which represents a 33% drop in just over six months. The stock just broke out above its downtrend today and we see continued optimism in the near term only. The company faces long-term headwinds from secular changes in their market where millennials aren't buying their bikes as much as baby boomers and as of now we're not on board for a long-term return to new highs.

Buy the August $45 Calls for $0.97 cents, and finance part of that by selling the August $32.50 Puts for $0.75 cents. This trade works in our favor on any upside move in the stock through the next 133 days, and the risk is that we'd have to buy the stock or exit the trade at a loss if the stock drops below $32.50. Considering this trade costs only $22 per set of option contracts, with upside many times that amount, the risk/reward is very favorable.