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
Mad Hedge Technology Letter
July 10, 2020
Fiat Lux
Featured Trade:
(HOW TWITTER KNOCKED IT OUT OF THE PARK)
(TWTR)
Twitter (TWTR) shares have really been explosive in the last 5 trading days moving higher in excess of 15%.
Speculation has been coalescing around a new project that is in the works that has Twitter launching a subscription service.
The social media juggernaut posted a job advert for engineers to develop a subscription platform.
“We are building a subscription platform, one that can be reused by other teams in the future,” the listing stated and investors took that cue to buy shares by the bucketful.
The new web engineers will be deployed on the company’s Gryphon team, which collaborates closely with the payroll team and the Twitter.com group.
An employee close to the discussion said the company is exploring “alternative revenue sources.”
The social media firm currently generates about 85% of its revenue from advertising, and it is safe to say they are a one-trick pony like Facebook.
Therefore, a subscription service would help diversify as businesses rein in their marketing budgets amid ongoing uncertainty.
The aggressiveness on show by Twitter’s CEO Jack Dorsey and his fellow management team is unsurprising.
Don’t forget that it was just in March that vulture fund investor Elliot Management, who owns a good chunk of Twitter, vowed to overthrow Dorsey after he announced plans to run both his creations, Twitter and Square, in Africa.
Running two Silicon Valley firms at the same time from Africa remotely stretched Elliot’s patience a tad thin and they hoped to go in for the kill and remove him cleanly.
Dorsey relented to Elliot’s demand and agreed to sideline his African safari and focus on juicing up its ad business.
Well, push comes to shove and Dorsey has decided on rolling out the time-honored way of tech companies making money – subscription as a service (SAAS).
Simply put, Twitter isn’t profitable enough and the buck stops at Dorsey.
Despite Twitter adding 14 million new users in the first quarter, its revenues rose just 3% from the March 2019 quarter, the smallest increase in over two years.
There is a substantial chance that the firm would be more likely to launch an offering utilizing its data and analytics, rather than moving to paid tiers for Twitter usage.
At the bare minimum, they will bring out some type of high-level tools to give ad buyers a way to pull away from the competition and that is worth paying for.
Twitter quickly changed the language of the job ad to make it look less conspicuous.
This isn’t out of left field.
In 2017, former CFO and COO Anthony Noto (now CEO of online lending start-up SoFi) had discussed the idea of adding premium services to TweetDeck, while acknowledging the separation of Twitter remaining a free-to-use service.
Global ad spending has been damaged due to the pandemic and investors are clamoring for more growth for a company that has several levers at their disposal.
They are finally putting these levers to work, and as global growth starts to slowly make a comeback, Twitter will be even better positioned than before.
Dorsey did agree with Elliot Management that Twitter should achieve a target to grow monetizable daily active users (mDAUs) by 20% in 2020 while accelerating revenue growth.
It is clear that Elliot Management is becoming impatient with Dorsey and will most likely look to make some waves in 2021 and finally replace the co-creator of Twitter.
Elliot Management is ruthless, but I do commend them on their magic in creating shareholder value even if they ruffle some feathers.
They have a track record of raising the profiles of other tech stocks and one that comes to mind is eBay.
Unfortunately for Dorsey, Elliot Management’s time-honored strategy usually comes in the form of wholesale changes in management boding poorly for Dorsey to cling on to his job through 2021.
Twitter is a great tech company, a unique asset in the tech ecosphere and Elliot simply believes Dorsey isn’t pressing the right keys on the piano right now.
This is a way of telling Dorsey that he is on thin ice and he is responding with some last-ditch efforts that could save his job.
However, I would like to point out that tech companies are benefitting from a once-in-a-generation tailwind of the coronavirus accelerating the migration to digital.
This essentially means that mediocre tech firms should have an easy time hitting expected targets even if they are lofty.
Just look at Thursday’s trading and the Dow index fell 360 points while the Nasdaq finished the day up 55 points.
The relative outperformance is just the beginning of tech’s dominance.
Dorsey just isn’t delivering the “growth” that comes to be expected from tech firms of Twitter’s caliber in the stage it’s at.
Hopefully, this will be the final wake up call because he certainly has the capacity to deliver what the vulture investors want, it will boil down to if he can apply the focus needed to acquire those mandated results.
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – Said Hungarian-American billionaire investor George Soros
CME has not been able to follow through on the strong daily move it made two days ago.
And we will begin to experience strong time premium erosion holding this position into next week.
As a result, I am going to suggest you close the position.
Here is how you close the position:
Sell to Close July 17 - $167.50 call for $2.40
Buy to Close July 17 - $172.50 call for $0.80.
The net credit will be $1.60 per spread.
If you traded the suggested 5 lot, the loss is $200.
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
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
July 10, 2020
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, JULY 17 OPTIONS EXPIRATION),
(REGN), (ILMN), (SGEN), (JPM)
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own FOUR deep in-the-money options positions that expire on Friday, July 17, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
Seattle Genetics (SGEN) 7/140-$145 call spread
Illumina (ILMN) 7/$320-$330 call spread
Regeneron (REGN) 7/$570-$580 call spread
JP Morgan Chase (JPM) 7/$80-$85 call spread
Provided that we don’t have another 3,000-point move down in the market by next week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our oldest and least liquid position which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.30 cost = $0.70 net profit
(23 contracts X 100 contracts per option X $0.70 profit per option)
= $1,610 or 16.27% in 18 trading days.
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 July 20 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, occasionally machines do make mistakes. 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 understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday, July 17. 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 month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
“The stock market is not expensive at 2% Fed funds and 2% government bonds,” said my old investor and mentor Leon Cooperman of Omega Advisors.
