A Spin of a (Fixed) Roulette Wheel

I don’t know what Apollo Residential Mortgage Inc. is nor what they do. Nor do I care. All I care is that they have an interesting chart and some dirt-cheap call options that might be worth something in the next week.

The Technical Analysis for Apollo Residential Mortgage Inc.

The chart would seem to display a strong bearish trend, starting at the beginning of March. So why a call? Because the trend seems to have run its course. Unlike in the past, I’m not relying on candlesticks or gap analysis to make any predictions on the future trends. Today, we’re doing some math.

First of all, you can see the 10-day and 30-day moving averages (the blue and red lines, respectively) plotted on top of the candlestick chart. Notice that everywhere the two moving averages intersect the trend changes. In fact, it’s more accurate to say that wherever the two lines intersect, a change in trend has been confirmed. Well, today, those two lines intersect once more, seemingly confirming a new upward trend.

The ADX for this chart is at 19.75, which is slightly low. A low ADX implies a dying trend. In this case, that dying trend is the bearish trend headed downward. This supports the above hypothesis that follows with the crossing of the moving average lines: AMTG is about to become bullish.

One last important factor here is the support at 16.15. Right now AMTG is at 16.17. Indicators showing an upward trend while AMTG just happens to be sitting on a support should add more weight to the prediction of an upward trend.

My Prediction for AMTG

I don’t know how high AMTG will go up. But I’m rather confident that it will at least turn upward. AMTG has previously reached 17.50, and I believe it will likely do so again on this new upward trend. With a dirt-cheap out-of-the money call at 17.50, I’m willing to put in a few Jeffersons to bet it will again reach that point within the week. In dollar values, moving from 16.17 to 17.50 is not a high climb. Might as well give this bet a shot.

My Move | AMTG Out-of-the-Money Call

I will buy 7 Out-of-the-Money calls at the strike price of 17.5. Each call contract will cost only 5 cents (times 100). So, I’ll buy 7 for a total of $35, the price of a good bottle of wine.

Cost to buy 7 calls at 17.5: ($35)

Net cost of call: ($35)