Mad Hedge Technology Letter
April 8, 2021
Fiat Lux
Featured Trade:
(SHOULD I BUY CLOUD FIRM OKTA IN APRIL?)
(OKTA), (TWLO)
The excess liquidity fueling the U.S. financial markets signal that investors are picking up the tab for heavy loss-making tech companies like never before.
Only in the U.S. can this happen at the scale it is happening as the U.S. controls its own currency, Central Bank, and possess the most reliable IPO process.
This phenomenon effectively supports a mindset of tech start-ups putting off profits for years and sometimes even decades.
Too much money chasing too few ideas and we have seen numerous examples of this with investors turning to ultra-leverage to figure out how to deliver real gains to investors.
Another heavy loss-making cloud company that I recommended buying “at the bottom” last March was identity-verification software maker Okta (OKTA) whose business was dramatically uplifted from the shift to remote work during the pandemic.
The recommendation worked like a charm with the stock essentially doubling from the time of that call.
But what’s in store for this password company moving forward?
First, let's rewind to the beginning of March when investors dumped the stock after a disappointing 2022 forecast and suffered from rumblings of the company paying too much to acquire Auth0 for about $6.5 billion.
The 30% sell-off was another example of growth companies’ ugly habit of volatility making it hard to time the entry points for heavy pocketed investors.
In the most recent analysts’ day, Okta projected sales will grow 30% in each of the next three years.
Revenue at the end of fiscal 2024 will be close to an annualized $2 billion, or about $500 million for the fourth quarter that year.
Yes, this is still a small company by any metric.
Demand for the software maker’s products, which help workers access corporate systems and consumers authenticate their identity online, has increased as more employees logged on from home in 2020.
For the 12 months through March 1, Okta was used more than 52 billion times to log into an app or website, almost 200% growth from the same period a year earlier.
Okta has retraced some of its losses when it announced it introduce 2 new products.
One, Identity Governance Administration, generates reports which show in an organization who has permission to see which parts of its systems.
The idea is to make sure people who’ve left the company or have changed roles don’t retain access to unauthorized areas.
Next, Privileged Access Management, governs who can view and change an organization’s critical systems.
The new areas expand the size of Okta’s total addressable markets to about $80 billion.
Management said these protections have become more critical as employees continue to work for home.
Many data breaches come down to server accounts that weren’t locked down when they should have been.
Admins change jobs at a rapid pace as companies look to poach talent more than ever now.
If it wasn’t the cause of the breach, it was a vector that the attackers used once they got in.
Being the cloud growth company it is, with only a market capitalization of $30 billion, the new announcements was the catalyst for Okta shares to surge 8% during intraday trading.
This is typical growth company price action.
The company is also dogged by persistent rumors it might sell to a larger tech company and I would say it’s a little surprising that the company is “buying growth” at such an early stage of its growth cycle.
But again, the subsidies keep flowing to these upstart tech guys because liquidity levels and bold risk appetites allow these types of aggressive financing that affect management decisions.
Overpaying to grow is where we are now in the tech cycle with the Central Bank effectively not allowing this bull market to die.
Okta CEO Todd McKinnon said he wants it to be one of five or six independent software clouds that every company needs.
And I also want to be one of five or six men in the world that every girl in the world wants to date.
I get it that McKinnon wants identity and access to remain Okta’s specialty rather than being subsumed into one of the other categories. Microsoft, which has identity software products that predate its cloud businesses, is already Okta’s main rival.
I would agree that Okta is prime for investors to buy the dip, but I would recommend traversing to higher waters because there are better cash burning, cloud names out there that are growing faster than Okta.
Honestly, Okta should be growing more for its small size, and “buying growth” seems like they are worried about an imminent collapse of growth which is a worrying sign.
Yes, I must agree that competition is stiff these days in the cloud ecosystem.
My conclusion with Okta is that any investor looking to buy Okta should instead buy communications-as-a-cloud firm Twilio (TWLO).
This is the communications platform operating behind the scenes of behemoths like Airbnb and Uber.
They have a 3-year revenue growth rate of 66% and grew 65% year-over-year last quarter.
That is what I call consistent!
And that is what I call cash-burning growth!
TWLO is also exactly double the size of OKTA at $62 billion and is predicting next quarter to grow 44% to 47%.
According to IDC, investments in digital transformation will nearly double by 2023 to $2.3 trillion, representing more than 50% of total IT spending worldwide, and it’s clear to me that more of this capital will flow into TWLO than OKTA.
OKTA is just a one-trick pony, but TWLO is a complex integrated system that Uber can’t live without. Many companies can live without Okta and plug in a substitute. The revenue is just way stickier with TWLO, and the strategic position is superior.
OKTA is a solid buy the dip candidate, but just buy TWLO instead.
“Bitcoin will do to banks what email did to the postal industry.” – Said Founder of the Swedish Pirate Party Rick Falkvinge
Global Market Comments
April 9, 2021
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, APRIL 16 OPTIONS EXPIRATION),
(TLT), (TSLA), (TSM)
Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than SIX deep-in-the-money options positions, all of which are profitable. These expire in five trading days on Friday, April 16, and I just want to explain to the newbies how to best maximize their profits.
I will start sending out trade alerts with the closing P&Ls over two days starting on Thursday, April 15 so I don’t overwhelm your inbox with an overabundance of profits.
It was time to be aggressive. I was aggressive beyond the pale.
These involve the:
Global Trading Dispatch
2X (TSLA) 4/$450-$500 call spread 20%
2X (TLT) 4/$142-$145 put spread 20%
(TLT) 4/$127-$130 call spread. - 10%
Mad Hedge Technology Letter
(TSM) 4/ $111-$116 call spread 10%
Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all six of these positions will expire at their maximum profit point.
So far, so good.
I’ll do the math for you on the United States Treasury Bond Fund (TLT) April 16 $142-$145 vertical bear put spread, which I initiated on March 23, 2021 and will definitely run into expiration. (TLT) shares are currently trading at $137.73, some $4.27 lower than the $142.00 strike price.
Provided that the (TLT) doesn’t trade above $142.00 in five days, we will capture the maximum potential profit in the trade. That’s why I love limited risk put spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in (TLT) shares.
Your profit can be calculated as follows:
Profit: $3.00 expiration value - $2.60 cost = $0.40 net profit
(4 contracts X 100 contracts per option X $0.40 profit per options)
= $1,600 or 16% in 19 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 April 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, 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, April 16. 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.”
If for some reason your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
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.
Ready to Put Out Any Fire
“You want to be in the stock in the second inning of the ballgame, and out in the seventh. That could be 30 years,” said legendary value stock manager Peter Lynch.
Mad Hedge Biotech & Healthcare Letter
April 8, 2021
Fiat Lux
FEATURED TRADE:
(A LOW-KEY POST-COVID-19 RECOVERY STOCK)
(REGN), (MRNA), (NVAX), (BNTX) (PFE), (VIR), (LLY), (RHHBY), (NVS)
If you still remember the news about the flash recovery from COVID-19 of then-President Trump during the campaign period last year, then you know that the express cure was not delivered by any of the vaccine makers that were all the rage at the time like Moderna (MRNA), Novavax (NVAX), BioNTech (BNTX), or even Pfizer (PFE).
Instead, the cure was credited to a lesser-known cocktail of antibodies, called REGEN-COV, developed by Regeneron (REGN).
Recently, the same treatment was used in Germany in response to the shortage of COVID-19 vaccines and the demand for alternatives.
Despite the promising results and the highly publicized effects of Regeneron’s treatment, the company’s share price still hasn’t shown any meaningful upside.
Nonetheless, Regeneron still secured some agreements for REGEN-COV.
Based on the June 2020 agreement of Regeneron with the US government, the company expects to sell $260 million worth of REGEN-COV in the first quarter of 2021 for a fixed number of orders.
For the second quarter of 2021, though, the two parties set different terms for their deal.
Under these new terms, the US government will pay per dose regardless of REGEN-COV’s dose size.
Given the latest numbers from Regeneron’s trials, this could mean lower costs for the company.
Data from the clinical trials showed that REGEN-COV had the same effectiveness at the lower 1,200 mg dosage compared to the currently approved amount by the US FDA, which is 2,400 mg.
In fact, Regeneron’s treatment is reported to be as effective as the COVID-19 antibody therapies developed by Vir Biotechnology (VIR) and even Eli Lilly’s (LLY) candidate.
Looking at the positive results from Regeneron’s Phase 3 trials for REGEN-COV, it’s reasonable to expect higher sales than previously estimated.
Now, Regeneron shared that it aims to supply 1.25 million doses of the COVID-19 antibody therapy at the lower but equally effective 1,200 mg dose level.
If the FDA agrees to this emergency use authorization request, then Regeneron will be able to supply twice the number of COVID-19 doses.
If it delivers these doses by June 30, the US government will buy them for $2.6 billion regardless of the dosage used.
On average, Regeneron is expected to generate roughly $2.9 billion in sales for its COVID-19 antibody treatment.
Meanwhile, if REGEN-COV gains full FDA approval and gets marketed commercially, then the treatment can rake in at least $3.5 billion and peak at $5 billion this year alone.
Outside its COVID-19 program, Regeneron actually recorded better-than-expected results last year despite the pandemic ravishing the economy.
For example, there was a rebound in demand for its top-selling Eylea, with sales of the wet age-related macular degeneration (AMD) drug rising by 10% in the fourth quarter of 2020 to reach a total of $1.34 billion.
Bolstering the dominance of Eylea in the AMD market and to combat emerging competitors like Roche (RHHBY) with Faricimab and Novartis (NVS) with Beovu, Regeneron is looking to expand the drug’s application to cover more age groups.
Meanwhile, another bestseller, Dupixent, reached $1.17 billion in sales last year.
This is an impressive climb for the atopic dermatitis medication, which was developed with Sanofi (SNY), since it only recorded $751.5 million in the same period in 2019.
That indicates roughly 75% growth, with over a million prescriptions written for Dupixent in the US alone.
However, only 6% of those eligible patients have been treated with Regeneron’s product thus far.
This means that Dupixent has a lot of room to grow, with this drug estimated to reach peak sales at $12.5 billion.
Needless to say, Dupixent is quickly transforming into a blockbuster treatment.
Since its approval for eczema in 2017, this drug has expanded its indication to cover moderate-to-severe atopic dermatitis not only among teens but also children. Notably, Dupixent holds a monopoly for this application to children.
Another revenue stream for Regeneron is its oncology sector led by Libtayo.
In 2020, net sales of this skin cancer treatment reached $348 million, showing an impressive 80% growth.
To date, Regeneron has at least 12 oncology treatments under clinical development.
In terms of the bottom line, Regeneron exceeded the expectations of $8.38 and reported adjusted earnings per share of $9.53 instead.
As vaccine rollouts continue to be a priority, it’s safe to say that the worst of the COVID-19 is just about in sight.
Consequently, investors are now looking into recovery and stocks that appear to be good buys when the coronavirus eventually becomes a thing of the past.
Regeneron is one of the attractive buys so far. While it has been underperforming in the past weeks, its business actually looks to be in great shape even if the pandemic goes on for longer.
Global Market Comments
April 8, 2021
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY),
(BAC)
I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.
I still have a record five positions left in my model trading portfolio, they are all deep in-the-money, and about to expire in six trading days. That opens up a set of risks unique to these positions.
I call it the “Screw up risk.”
As long as the markets maintain current levels, ALL of these positions will expire at their maximum profit values.
They include:
|
2X (TSLA) 4/$450-$500 call spread |
20.00% |
|
2X (TLT) 4/$142-$145 put spread |
20.00% |
|
(TLT) 4/$127-$130 call spread |
-10.00% |
With the April 16 options expirations upon us, there is a heightened probability that your short position in the options gets called away.
If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away.
I’ll use the example of the Tesla (TSLA) call spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point the day before the April 16 expiration date. In other words, what you bought for $44.00 on March 19 is now worth $50.00, giving you a near-instant profit of 13.63%!
In the case of the Tesla (TSLA) April $450-%500 in-the-money vertical Bull Call spread all have to do is call your broker and instruct them to “exercise your long position in your (Tesla) April 16 $450 calls to close out your short position in the (Tesla) April 16 $500 calls.”
This is a perfectly hedged position, with both options having the same name and the same expiration date, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought Tesla at $450 and sold it at $500, paid $44.00 for the right to do so, so your profit is $6.00, or ($6.00 X 100 shares X 2 contracts) = $1,200. Not bad for a 20-day limited risk play.
Sounds like a good trade to me.
Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (TLT). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (TSLA) position after the close, and exercising his long (TSLA) $500 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
