Trump’s Tariffs Prompt Market Reaction Amid Economic Uncertainty
Earlier this week, President Trump announced a wide range of reciprocal tariffs, leading to increased selling pressure and a decline in the Stock market. In the days before the announcement, markets had shown a steady upward trend, but this momentum shifted as Trump introduced a baseline 10% tariff rate. Additional tariffs apply to countries deemed the worst offenders by the administration.
The unexpected severity of these tariffs has taken many investors by surprise. Economists indicate that this policy represents the most extensive tariff initiative on U.S. imports in over a century, causing the market to brace for a potentially protracted trade war.
Managing risk effectively is crucial in this climate. Investors should focus on stocks leading the market rather than pursuing those in downtrends. A defensive shift has certainly been observed in 2025, with utility stocks, in particular, demonstrating resilience during market corrections, a trend that re-emerges this year.
The Zacks Rundown
American Electric Power (AEP) shares have significantly outperformed broader market indices this year. This company operates within the Zacks Utility – Electric Power sector, currently ranked in the top 28% among over 250 Zacks Ranked Industries. Given this ranking, the utility sector is expected to outperform the market in the next 3 to 6 months.
This group has not only excelled over the past year but is also up nearly 7% so far in 2025. Stocks in this sector have clearly diverged from overall market trends:
Image Source: Zacks Investment Research
Historical assessments indicate that around half of a stock‘s price appreciation is attributed to its sector and industry affiliation. In fact, the top 50% of Zacks Ranked Industries outperform the lower half by a margin exceeding two to one.
American Electric Power stock is currently reaching a series of 52-week highs, supported by increasing trading volume. Options present various opportunities for leveraging this upward trend, allowing investors to customize their strategies according to market conditions.
Option Essentials
Before we explore today’s trading strategy, let’s revisit some basic concepts of options. There’s no need for complex calculations; simpler approaches tend to yield the best long-term results.
Options are standardized contracts granting buyers the right, but not the obligation, to buy or sell the underlying stock at a predetermined strike price. A call option allows purchase rights, while a put option allows selling. The party purchasing the option is the buyer, while the seller is called the writer.
Options are time-sensitive and expire after a certain period. They can vary from weekly to monthly, including LEAPS, which extend beyond a year.
Options consist of two components: time value and intrinsic value. In-the-money options feature both, while at-the-money and out-of-the-money options possess only time value. Expiration marks the point at which options lose their time value completely.
Now, let’s examine a call option purchase strategy.
Electrify Your American Power Returns
American Electric Power is currently in an upward price trend and represents a favorable candidate for a call option purchase:
Image Source: StockCharts
When executed correctly, options trading can yield substantial profits with limited risk. In today’s scenario, we aim for the May 16th expiration with a 90-strike price. By purchasing this option, we gain the right, but not the obligation, to acquire 100 shares of AEP stock at $109.76 on or before May 16th, just over a month away.
The risk/reward profile of this trade is detailed in the table below. As it stands, American Electric Power stock trades at $109.76 (orange box). We are acquiring one 90-strike call option at an option premium of 20 points. Given that options encompass 100 shares of the underlying stock, the total investment cost for this call option trade amounts to $2,000, as highlighted in yellow.
Image Source: Zacks Investment Research
The top (blue) row displays the performance of AEP stock based on various percentage scenarios at expiration. The bottom (purple) row illustrates the corresponding percentage return for our call option trade. Should AEP remain flat, this trade might incur a minor loss of 1.2%. A 5% increase in AEP would yield a 26.2% profit. In the event of a 15% rally, we would realize an impressive 81.1% profit.
This example underscores the leverage that options provide. An investor who directly purchases 100 shares of AEP would need to invest $10,976, representing a larger commitment. With a 15% rise in the stock, this would yield a profit of $1,646.
Conversely, the option trader’s contribution amounts to only $2,000 for controlling the same quantity of AEP shares. A similar 15% increase in AEP stock would net a profit of $1,622—comparable to stock ownership but requiring significantly less capital.
Importantly, this option possesses minimal time value. The 0.24 points of time value (red box) reflect only 0.2% of the underlying stock price. Managing risk effectively when purchasing call options entails minimizing time value while maximizing intrinsic value, as time value tends to dissipate quickly approaching expiration.
Bottom Line
With American Electric Power showing signs of growth, the environment is ripe for AEP stock to sustain its upward trajectory. A solid foundation in the utilities sector could propel shares to new heights.
Utilizing low-risk call options offers a strategic method to capitalize on this trend. This approach allows us to enhance American Electric Power’s stock returns through options trading. Observe AEP stock closely as we progress further into 2025.
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American Electric Power Company, Inc. (AEP): Free Stock Analysis report.
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
