Global Market Comments
August 14, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, AUGUST 16 OPTIONS EXPIRATION),
(CRM), (FB), (M), (VIX)
(SILICON VALLEY REAL ESTATE SAYS THE BULL MARKET IN TECH CONTINUES)
Followers of the Mad Hedge Technology Letter have the good fortune to own three deep in-the-money options position that expires on Friday, August 16, and I just want to explain to the newbies how to best maximize their profits.
This involves the:
the Salesforce (CRM) August 2019 $125-$130 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00
the Macy's (M) August 2019 $23-$25 in-the-money vertical BEAR PUT spread at $1.74 which will expire at $2.00
the Facebook (FB) August 2019 $167.50-$172.50 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00
The total profit on all three positions will increase the value of our $100,000 model trading portfolio by 3.68%, or $3,680. This position only became possible due to the extreme volatility (VIX) seen in the market in recent weeks.
Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, these positions should expire at its maximum profit points. So far, so good.
I’ll do the math for you on the Salesforce (CRM) position. Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.50 cost = $0.50 net profit
(22 contracts X 100 shares per option X $0.50 net profit)
= $1,100 or 11.11% in 7 trading days.
One of the reasons that I run these positions into expiration is that with volatility high, and therefore the implied volatility on the options, we get paid much more to run these into expiration than we have in the past.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning August 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, mistakes occasionally do occur. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen when a security has only hours or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter end.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.
Well done, and on to the next trade.
Sometimes the Old Tricks Work the Best
Mad Hedge Technology Letter
August 14, 2019
Fiat Lux
Featured Trade:
(WHY UBER BOMBED)
(LYFT), (UBER)
I told you to stay away from the Uber IPO!
The technology industry is just one piece of the pie and is now being utterly eclipsed by geopolitics left, right, and center.
At times like this, fundamentals and growth rates go out the window.
It’s a shame because growth rates for the best of breed in technology are still nothing short of spectacular.
The elevated risk here is that frontier companies such as Uber (UBER) become marginalized and their narrative starts to turn into a version of technology that is too expensive and unable to pin down expenses.
The easy money in tech is no more as we are barreling towards a global slowdown with China and America doing their best to move forward the global recession into the beginning of 2020.
So when Uber prints $5.2 billion in losses from the prior quarter which is a sequential increase of 30%, the vicious sell off in shares epitomizes the souring of sentiment that is pervading through the equity landscape.
The Uber’s earnings call was summed up when CEO of Uber Dara Khosrowshahi chimed in saying, “No doubt in my mind that the business will eventually be a break even and profitable business.”
These vague statements that offends time-sensitive hawks is a recipe for disaster in August 2019.
The purse strings of tech are not nearly as loose as they once were even 6 months ago.
Investors want profit making enterprises mixed with accelerating revenue growth – put your money where your mouth is type of ventures.
This has reduced the appealing side of tech down to outperforming software companies and even they are battling in the trenches as the wave of geopolitical risk-off sentiment crushes shares.
I would sell every Uber dead cat bounce because there is no way that Uber shares will surpass its all-time high of $46.38 this year.
The surge in bond prices show that risk appetite has dried up and Uber is unfortunately at the opposite end of the risk appetite spectrum.
I would also put its brother in arms Lyft (LYFT) in the same boat.
Lyft loses less money but are a speculative bet to “eventually” make money, and that is exactly what people don’t want to hear right now.
It will be a slippery slope for any tech company further out on the risk curve to invest in a business model that doesn’t turn a profit.
As it stands, Uber and Lyft were lucky to go public when they did, barely getting the IPOs over the line.
If they waited a few more months, they would have had to postpone it.
Expect meager M&A movement moving forward as the global slowdown will test the business models of every tech company and that means the weakest will need to restructure, go under, or even sell themselves at garage sale prices.
It is time to hunker down in tech shares and not bet the ranch.
The positions I have are short-dated deep in the money call spreads in software stocks that are bets that shares won’t go lower in a straight line.
I have fused that with positions in semiconductor stocks from the short side as a tech global slowdown means less demand in consumer electronics which hoover up semiconductor chips.
The shares of FANGs will continue to rocket if Silicon Valley commercial real estate is any indication of the future growth rates.
The group is gobbling up office space at such a prodigious rate that only a vast expansion of their business would justify these massive long-term commitments.
Commercial real estate commitments are one of the most valuable leading indicators of stock performance out there. They show what the companies themselves think of their future prospects.
Apparently, the stock market agrees with me. Technology is virtually the only group of shares moving to new all-time highs in these otherwise dismal trading conditions.
Just this month, Facebook (FB) signed a lease for the entire brand new 43-story Park Tower in downtown San Francisco, and that’s just to house its Instagram business.
Google (GOOGL) is leasing 39% of the office space in Mountain View, CA. It is currently in negotiations with the nearby city of San Jose to build a skyscraper occupying an entire city block that will house 10,000 tech workers. It also is building another 1 million square feet near an old prewar dirigible landing strip in Moffett Park.
Apple (AAPL) is hogging some 69% of the office space in Cupertino, CA. It is just now moving into its new massive spaceship-inspired headquarters, where 10,000 workers will slave away. The world’s largest company is currently on the hunt for a second headquarter's location.
Netflix is slowly gobbling up Los Gatos, CA. It was recently joined by the set top device company Roku (ROKU), which is growing by leaps and bounds.
Fruit canning was the original industry of Silicon Valley at the turn of the 20th century, taking advantage of the surrounding peach, plum, and apricot groves. When I was a kid after WWII, defense firms such as Lockheed (LMT) took over, creating thousands of high-paying engineering jobs.
It didn’t hurt that Stanford University was spitting distance away, and the University of California was just on the other side of the bay. These two schools supplied the manpower to fuel the hypergrowth ahead.
To say the growth has caused local headaches would be an understatement in the extreme. The San Francisco Bay Area now sports the world’s most expensive residential housing. The median San Francisco home price has skyrocketed to $1,334,000 and requires an annual income of $334,000 to support it.
Small businesses such as dry cleaners, nail salons, restaurants, and barber shops have been driven out by soaring rents. It’s not uncommon now to go out to dinner only to find a “closed” sign on your favorite nightspot. Your personal assistant now has to travel miles just to get your suits pressed.
As for traffic, forget about it. Rush hour has ceased to exist. Freeways are now jammed a nonstop 12 hours a day in the worst neighborhoods.
Success has its price, and this was never truer than in Silicon Valley.
“Our industry does not respect tradition – it only respects innovation.” – Said CEO of Microsoft Satya Nadella
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more