An options trade on this potential winner from U.S.-China trade talks that minimizes risk

CNBC

10-06-2025

The dominant theme this year has been tariffs, and the elephant in the room remains China. With trade talks resuming in London this week, there's renewed hope for some progress. That said, China is known to be a tough negotiator, and we've seen talks fall apart before. The uncertainty around the outcome turns this into a binary event—one headline could send markets tumbling in a single day. That brings me to the importance of trade management. When you have a clear exit plan, opening new trades becomes much easier and objective. For this setup, my exit strategy is very aggressive, which I detail below. But first, let's look at the technical indicators that led me to take this trade. MACD (5,13,5): I like to incorporate the MACD indicator into my analysis from time to time because it's a reliable tool for spotting early entry signals. While the traditional MACD can be a bit slow to react, I often rely on a short-term MACD to catch momentum shifts sooner. A bullish crossover, where the MACD line crosses above the signal line, often serves as an early cue to consider entering a trade. In BABA's case, we just saw this faster MACD generate a bullish crossover on June 3, pointing to a potential early entry opportunity. DMI (Directional Movement Index): The DMI (Directional Movement Index) consists of three components: DI+ (green), DI- (red), and the ADX (blue), which gauges the strength of the trend. Typically, when DI- is above DI+, it reflects bearish momentum and a prevailing downtrend. But when these lines begin to shift direction, it can signal that a trend reversal is underway. In the case of BABA, we're seeing DI+ start to rise while DI- is declining, indicating that bullish momentum is building as bearish pressure fades—an encouraging sign that a trend change may be in progress. RSI (Relative Strength Index): RSI is a versatile indicator that can be used to identify both reversals and trend continuation. In this case, the reading is as straightforward as it gets—RSI has been steadily rising since 5/30, signaling that bullish momentum is building and the current trend is gaining strength. The trade setup: BABA 121-122 bull call spread To capitalize on the bullish momentum and the potential for a positive outcome from the China talks, I'm using a bull call spread. This strategy lets me risk as little as $50 per trade, and it's easily scalable — simply add more contracts. For example, using 100 contracts means risking $5,000 to potentially earn $5,000, provided BABA closes at or above $122 by expiration. With the stock currently trading at $121.48, the trade is structured by buying the $121 call and selling the $122 call—a clean, defined-risk setup that allows me to participate in the upside without overexposing capital. I dive deep into setups like this in my book, Mean Reversion Trading , and share countless real-world examples on my website . Here is my exact trade setup: Buy $121 call, July 11 expiry Sell $122 call, July 11 expiry Cost: $50 Potential Profit: $50 Risk management Given the binary nature of the upcoming China talks, a negative outcome could trigger a sharp sell-off in stocks with China exposure. Fortunately, debit spreads like this one offer some protection — they're less sensitive to sudden price swings compared to outright long options. One clear exit strategy would be to close the trade immediately if the talks break down. Another, more tactical approach is to use technical analysis. Since the MACD crossover was the basis for entering this trade, a reversal in the MACD — where the MACD line crosses back below the signal line — would serve as a strong technical signal to exit the position and preserve capital. -Nishant Pant Founder: https://tradingextremes.co Author: Mean Reversion Trading YouTube, Twitter: @TheMeanTrader DISCLOSURES: Pant has a BABA 121-122 call spread expiring on July 11. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.