Shortly after the open today, I filmed my weekly In The Money segment with Fidelity Investments. Click below to watch and see my notes below the video:
Show notes and charts:
Macro: Three major near-term market drivers… 1) Election Outcome, 2) Corporate Earnings, 3) Virus Surge/ Economic Cost of Mitigation Attempts
1) The election we should know the outcome by the end of next week. This should determine the speed that we get added fiscal stimulus and the likelihood of higher corporate taxes, capital gains taxes, and increased infrastructure spending.
2) Q3 Corporate Earnings will pretty much be done by the end of this week. We have seen financials, homebuilders, and Energy stocks all respond very poorly to their results. Are good results already baked into the cake for mega-cap tech stocks, on Thursday Apple, Google, Amazon & Facebook all report, or nearly 17% of the SPX and 35% of the Nasdaq 100.
3) The Virus remains unknowable that will likely be with us for some time. While there has been some encouraging news on the mortality rate of the virus of late, vaccines can not come soon enough as hospitalizations are rising rapidly with cases spiking to their highest levels since the start of the pandemic. What sort of mitigation steps will be taken as we head into the winter and what sort of drag will it be on the economy if regional lockdowns take place at a time where tens of millions of Americans are receiving some form of unemployment assistance despite the fact of no new fiscal stimulus likely until next year?
Trade Idea #1: SPY Hedge
The S&P 500 is up 3% on the year, and down about 7% from its all-time highs made on Sept 2nd, it has come a long way from its depths in March, up 52% after its one month 35% plunge from Feb to late March. The etf that tracks the SPX Index is trading today below a sort of battleground level, the Feb high before the plunge. The range is well defined the recent all-time high just below 3600 and the recent late Sept low near 3200.
Why Hedge? So much we don’t know, about the election and the course of the virus and what it means for the economic recovery at a time when there will not be added fiscal stimulus possibly for months, which could both spook stocks no matter who wins the election.
Hedge Idea: SPY ($332) Buy Nov 330 – 300 Put Spread for $7
-Buy to open 1 Nov 330 put for $10
-Sell to open 1 Nov 300 put at $3
Break-even on Nov expiration:
Profits of up to 23 between 323 and 300 with max gain fo 23 below 300
Losses of up to 7 between 323 and 330 with max loss of 7 above 330
Rationale: this trade idea risks ~2% of the stock price with a break-even down 2.7%, with a max gain of 7% if the SPY is down 10% in three weeks, which includes the election and whatever comes after it for more than 3 weeks.
Trade Idea #2: AAPL Earnings Hedge
AAPL will report fiscal Q4 results Thursday after the close. The options market is implying about a 5% move in either direction on Friday.
Long holders who do not want to sell their stock, but are more worried about downside associated with their earnings/guidance and post-election volatility should consider collars, selling 1 out of the money call (per 100 shares long), and using the proceeds of that sale to help finance the purchase of a downside put, essentially limiting potential upside in the sock between now and the chosen expiration to the short call strike, but also limiting losses in the stock down to the long put strike, for instance:
vs 100 shares of AAPL long at $114 – Buy Dec 100 – 130 Collar for Even Money
-Sell to open 1 Dec 130 call at $2.30
-Buy to open 1 Dec 100 put for $2.30
Break-even on Dec expiration:
Profits of the stock up to 130, if the stock is 130 or higher on Dec expiration the investor’s stock would be called away, but the investors can always buy to cover the short call to keep the long stock position intact.
Losses of the stock down to 100, protected below. if the stock is at or below 100 on Dec expiration the investor will need to make a decision whether they want their stock to cover the long put, so again will need to make a decision whether they want to stay long.
Rationale: an investor would collar their stock into an event like earnings, or into a period of uncertainty like the post-election days/weeks if they have gains they want to protect down to a certain point and they are more willing to give up potential gains in place of having defined risk to the downside.
Lookback: AXP Put spread from Oct 21:
BEARISH TRADE IDEA: AXP ($103) BUY NOV 103 – 93 PUT SPREAD FOR $3
-Buy to open 1 Nov 103 put for 4.30
-Sell top open 1 Nov 93 put at 1.30
The stock broke down after disappointing earnings guidance last week, the put spread that cost $3 when the stock was $103 is now worth $7 with the stock near $93 and 3 weeks to expiration…
I would take the profit as the position can only be worth $10 on Nov expiration, or roll the position down and out playing for lower lows.