HPQ: A Breakout in the Making

The European Summit slated for Friday seems to be hovering over the market like a wet blanket.� Given the uncertainty surrounding the meeting, intraday movements have been quite erratic and downright difficult to divine over the past few trading sessions.

When heading into an important event that will act as a catalyst for either a large move up or down in the market, it�s never a bad idea to adopt more of a defensive posture.

Playing defense may consist of tightening stop-losses, taking partial profits or adding option-hedging strategies to the mix.� It�s also prudent to keep an eye out for potential trade opportunities that may trigger if the market reacts favorably to positive news from the summit.

One such stock that appears to be approaching a key inflection level in the chart is Hewlett-Packard Co. (NYSE:HPQ).� While the world�s leading PC manufacturer has spent much of 2011 in a precipitous downtrend, it has recently turned a corner and has stabilized above its rising 50-day moving average.

Unfortunatley for the bulls, the $28.60 level has stymied every attempt to continue the relatively nascent uptrend.

Source:� MachTrader

Looks like we have a classic breakout pattern in the making.� Once HPQ is finally able to muster the strength to breach this level, traders should consider bullish plays.

With implied and historical volatility virtually identical, neither option buyers nor sellers have the upper hand here.� As such, traders could select whichever option strategy they feel best fits the outlook on HPQ stock.

One trade worth consideration is buying the HPQ Feb 28-31 bull-call spread. This trade consists of buying to open the Feb 28 Call while selling to open the Feb 31 Call.� Prices that work right now are buying the $28 call for a $1.80 debit and selling the $31 call for a 75-cent credit, for a net debit of $1.05.

The max risk is limited to the debit paid at trade inception, and the max reward it limited to the distance between strikes ($31 – $28 = $3) minus the debit.

At the time of this writing Tyler Craig had no positions on HPQ.