Followers of the Mad Hedge Fund Trader alert service have the good fortune to own TWO deep-in-the-money options positions that expire on Friday, May 21, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
(TLT) 5/$143-$146 put spread 10.00%
(UNP) 5/$200-$210 call spread 10.00%
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, the Union Pacific (UNP) May 21, 2021, $200-$210 vertical in-the-money vertical Bull Call debit spread, which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.70 cost = $1.30 net profit
(12 contracts X 100 contracts per option X $1.30 profit per options)
= $1,570 or 14.97% 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, May 24 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, May 21. 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.
You Can’t Do Enough Research
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/girls.png447479Douglas Davenporthttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDouglas Davenport2021-05-18 08:02:102021-05-18 02:52:24How to Handle the Friday, May 21 Options Expiration
High multiple tech stocks often overshoot on the way up and overshoot on the way down.
This is predominately driven by uncontrolled momentum as investors and traders resort to margin to borrow money and add leverage to positions and trends that seem to be working at the time.
Since the start of the year, technology has had to come to grips with a sudden rerating of valuations.
For example, a bellwether stock for the future success of tech, Tesla (TSLA) has corrected 20% year-to-date after more than 700% move up in 2020.
Reliable big-cap tech has been more steadfast in 2021 such as the likes of Apple (AAPL) who have only experienced a less than 2% year-to-date decline in shares.
The biggest winner so far of big-cap tech has to be Alphabet (GOOGL) whose shares have risen around 25% since the beginning of the year.
Even with sky-high expectations, Google is hitting it out of the ballpark and then some.
Simply meeting or doing a nudge over expectations this past earnings season has proved not enough for underlying shares to surge on the results meaning we are fully priced.
Naturally, the more speculative business has felt the worst of the carnage with SPACs down half from their peaks and “artisanal” tech down 30%-50%.
This doesn’t mean tech is over.
Hardly so – It’s just resting.
But readers and investors will need to traverse through a period of multiple contraction and consolidation as high-priced tech stocks are re-rated lower until we reach appetizing multiples.
Simply put, we got ahead of ourselves and there is only so much leverage that can be taken out to chase the rainbows and feed off the momentum.
Microsoft (MSFT) has been another stout stock that is up around 12% year-to-date and a great place to hide out during the consolidation phase.
The cause of the rerating derives specifically from upper management guiding down future revenue and profitability targets.
I have read countless earnings reports that describe a comprehensive dilemma in which the overall structure of the company couldn’t be healthier yet beating prior years’ Covid performance is impossible on a year-to-year basis.
Readers need to understand this year is still priced as a Covid year, but tech companies won’t nearly do as well because the conditions that engulfed Covid like work-from-home and the absence of a vaccine are not here anymore.
There is a health solution in the U.S. and in parts of Europe there are partial solutions and certainly, no lockdown as the Chief of the CDC signals masks are not needed for the vaccinated in public.
The tech market needs to readjust its expectations that will hand off to more of a normalized metric environment and that will happen naturally as we move closer to 2022 and into it.
On a calculation basis, comparing data from 2022 and 2021 will strip out the volatility from the 2020 and 2021 comparisons.
Remember that management uses the prior year as reference points for performance and that phenomenon is now hurting the appearance of relative outperformance.
A top executive at a fintech company had this to say, “The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation.”
I’ll take a 5-year digital transformation in one year if the second year is a time that is needed for earnings’ expectations to consolidate for half a year or so.
I would take that deal anytime if it was my company.
The data also suggests how breathtaking companies like Google and Microsoft are if their future guidance is immune to any expectation.
They are beating whatever consensus is in a Covid year or not.
Take a look at some of the darlings of tech in the height of pandemic like Teladoc (TDOC), and shares are off around 33% year-to-date and even went through a 40% drop from mid-February to the beginning of March.
Avoid those now!
Even if it's not related to cloud software stocks, the dearth of semiconductor chips is beginning to cause pain in every nook and cranny of the global economy catalyzing many firms to delay or even cancel production let alone roll out new models.
This adds to the global malaise of a supply chain that many managements describe as “topsy-turvy.”
Not only is the bottleneck happening as we speak, but it appears as though it could last at least 2 or more years.
When the Fed talks about “transitory” inflationary pressures, at least as it relates to tech, I am not sure what they are smoking.
There has been no concrete data in which they have offered to suggest that it will be transitory unless they have a different definition of transitory from mine.
The accumulation effect of these pressures is why the tech-heavy Taiwan stock market, FTSE TWSE Taiwan 50 Index, comprised of tech stalwarts like Taiwan Semiconductor Manufacturing (TSM) and Hon Hai Precision Industry, declined over 2% today after losing over 8% last week.
Ultimately, investors are moving to higher ground and seeking predictable profitability and raw size over elevated growth rates and loss-making EPS figures.
When the goalposts move, we must move with them and that is what has happened.
Tech investors are more conservative than last year and until the goalposts widen a bit as I expect as we move into Q3 and Q4, we need to be aware of the new rules of the game or who gets penalized for them.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-17 11:02:502021-05-25 02:20:07Multiple Contradiction
“Technology is cool, but you've got to use it as opposed to letting it use you.” Said American Singer/Songwriter Prince
https://www.madhedgefundtrader.com/wp-content/uploads/2021/05/prince.png482388Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-17 11:00:212021-05-17 11:20:57May 17, 2021 - Quote of the Day
The 19th century humorist and writer, Mark Twain, said, “History never repeats itself, but it rhymes.” This is certainly one of those rhyming times.
Remember back in 2011 when the Dow hit a short-term peak at $12,300 in May of 2011? The Cassandras had a heyday. The bull market was over, stocks were imminently going to crash, and the next stop for the Dow was $3,000. Gold and bonds were the only safe places.
Those who drank the Kool-Aid missed the greatest investment opportunity of the century and are now driving for Uber cars to earn their crust of bread. Those who drank the Kool-Aid twice sold their homes as well ahead of the greatest real estate boom of all time.
Not that a correction wasn’t sorely needed, we needed to scare money out of what I call the “super liquidity” investments like Bitcoin, SPACS, and tech companies selling at 100 times sales with failing business models.
We also needed to put the fear of god into newbie day traders by teaching them that stocks go down as well as up. We’ve already made good progress on this front. With many of the “meme” stocks down by half or more since February, we are already making good progress on that front.
What will power the Dow to my now very prescient looking $40,000 target by yearend? The unwind of the 40-year-old bull market in bonds has barely just begun. Ten-year US Treasury bond yields ($TNX) have only appreciated from 0.32% to 1.68%, compared to 5.6% at the last 2007 peak. That means there are still many tens of trillions of dollars to shift out of bonds (TLT) and INTO STOCKS!
Once the current correction ends, money will pour back into the recent leaders, the economic cyclicals, including financials, commodities, industrials, and commodities.
Technology will stay in the penalty box for the foreseeable future until they become under-owned and cheap again. The good news here is that tech earnings are growing at such a prolific rate that the sector is losing two price earnings multiple points a month and will return to the bargain basement in the not-too-distant future.
The long term view here is that you want to rent growth, but own tech, which still has double the growth rate of everything else.
It all makes my 2021 $40,000 Dow Average target look like a piece of cake, and my 2030 goal of $120,000 positively conservative, cautious, and circumspect.
Notice that our 2,000 point-swan dive in the Dow last week lasted only three days, and then delivered the sharpest fall in the Volatility Index (VIX) in history, from $29 to $19 in only 24 hours. The writing is still on the wall. People want to BUY.
Inflation explodes, with the Consumer Price Index posting a ballistic 4.2% YOY rate, the fastest gain since 2009. The Fed believes this is a temporary surge, the markets not so much. Bonds take it on the nose. Keep selling rallies in the (TLT). We’re making a fortune here.
Volatility Index (VIX) soars to $29, almost doubling in a week. Call me when it tops $30. That’s the usual signal for a short-term stock market bottom. I’m relaxed because I’m going into this with 80% cash and have just made a huge fortune on bond shorts. Value and cyclicals are still the Big Play. That was the message of the stock market on Friday’s wild day which saw an 11-basis point trading range in the ten-year US treasury bond. If you think the next big move in rates is up, then Cyclicals will roar, and techs will fade.
It’s all about buying what people are underweight and selling what they are overweight. I’m looking for cyclicals that have recently corrected. Stay tuned to this station.
US Inventories see solid gains as retailers load the boat for the biggest economic recovery of all time. March was up 1.3%. One of an endless series of data points pointing to the best business conditions in a century.
The Home Buying Frenzy continues, with the median price for a single-family home soaring by 16.2% to $319,200 in Q1, according to the National Association of Realtors. Record high prices are hitting all markets. The perfect upside storm continues.
Weekly Jobless Claims come in at 473,000, a new post-Covid low. Continuing claims fall to 3,655,000. The greatest economic recovery of all time continues.
Producer Prices leap in April, up 0.6% following a 1% gain in March. It is a natural follow-on from the hot CPI. The PPI tracks changes in production costs, and supply bottlenecks and shortages tied to the pandemic recovery have caused commodity prices to soar. Temporary or continuing, that is the big debate. Watch the bond market for clues.
Stanley Druckenmiller says Bonds are Toast, and The Dollar is Worse. I couldn’t agree more with my old friend and trading counterparty. Current Fed policies are now the most extreme in history and threaten the reserve status of the US dollar. Sell all rallies in the (TLT) and the (UUP). My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 3.83% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 30% invested and 70% cash.
My 2021 year-to-date performance soared to 63.59%. The Dow Average is up 13.47% so far in 2021.
During the stock market meltdown, my hedges with shorts in the S&P 500 (SPY), NASDAQ (QQQ), and the United States Treasury Bond Fund (TLT) performed spectacularly well, leaving me up on the week. I managed to limit myself to only two stop losses, in Microsoft (MSFT) and Delta Airlines (DAL).
While everyone else was running around like chickens with their heads cut off, I was as relaxed as ever. Our worst case for May is that we will be only up single digits, instead of the double-digit gains of the past six months. That is not a bad “worst case” to have.
That brings my 11-year total return to 486.14%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 127.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33million and deaths topping 586,000, which you can find here.
The coming week will be a weak one on the data front.
On Monday, May 17, at 9:45 AM, the New York Empire State Manufacturing Index for May will be out
On Tuesday, May 18, at 10:00 AM, the Housing Starts for April are announced.
On Wednesday, May 19 at 2:00 PM, Minutes from the last Federal Reserve FOMC Meeting are published.
On Thursday, May 20 at 8:30 AM, the Weekly Jobless Claims are published.
On Friday, May 21 at 10:00 AM, Existing Homes Sales for April are announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, we had a big 4.7 earthquake at Lake Tahoe last week. The healthy live trees vibrated and swayed. But all of the brittle dead trees killed by pine beetles during the draught snapped at the base and fell over.
Those blocked all the fire roads, so every emergency and public service organization on the lake was called up and sent up into the mountains with chain saws. That included me, a member of Lake Tahoe Search and Rescue.
I hiked up to 9,000 feet with a 50-pound load and went to work. We cut these enormous 100-foot conifers into one-foot rounds and then rolled them off the road. Everyone else on the job was under 40.
After a day of heavy lifting, I hiked down the mountain and collapsed into bed. I slept for 12 hours, which is why the Monday letter was late. They say 70 is the new 40. I am the proof of that.
So can 100 be the new 60? One can only hope.
How was your weekend?
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
20 Year Chart of Ten Year US Treasury Yields
https://www.madhedgefundtrader.com/wp-content/uploads/2021/05/jtfootlog.jpg484433Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-17 10:02:372021-05-17 10:22:00The Market Outlook for the Week Ahead, or Why History Rhymes
The tech sector and the U.S. government are poised to engage in a more transactional relationship than ever before after the cybersecurity attack on Colonial Pipeline and the U.S. President’s executive order that followed it.
This doesn’t mean just servicing an email account, but this will incorporate broad-based networking cloud infrastructure from the top-down and the bits in between.
Technology is just getting too good, too fast, and applicable to the point that it allows nefarious actors to wield it in a way that could damage and permanently set back sovereign nations and global business.
Don’t get me wrong, this was already in the works, and U.S. President Joe Biden has signaled his intent to ramp up the IT spent, but this cyberattack that is causing gas hoarding in parts of South Eastern United States is just the event to really kick this initiative into overdrive.
Colonial Pipeline paid the almost $5 million ransom payment that will encourage similar type of behavior in the long-term.
The Cyberattack also means that the relationship between U.S. tech and government could swerve from net negative of a relentless anti-monopoly narrative to one in which big tech will be anointed as the saviors to the foreign cyber-criminals and paid handsomely to defend the operations of private and state U.S. business.
The latter sounds much better to Silicon Valley than the former and the bigwigs in Silicon Valley might ostensibly push this marketing dynamic of internet protection to save their bacon and get the regulatory heat off their back.
Polarizing figures such as U.S. Senator Elizabeth Warren have made it a point to bash big tech whenever she sees fit which is more often than not.
CEOs like Facebook’s Mark Zuckerberg have tried a disingenuous approach of blaming China’s marginal data privacy policies as a way to protect its Instagram business and prevent growth monster TikTok, a Chinese app, from cannibalizing its cash cow business.
The origin of the Colonial Attack is purportedly to be Russian which would offer more fuel to the fire and create a ready-made reason for U.S. government to pour incremental billions into Silicon Valley and its array of almost multi-trillion dollar heavy hitters while protecting their business moat.
This event also means Tesla is toast in China.
Officials in China banned Tesla vehicles from military bases and housing compounds amid concerns that potentially sensitive data from its onboard cameras could be collected and stored on Tesla servers.
Once the data privacy genie is out of the bottle, it’s hard to contain the fallout and Tesla will need to adopt a whack-a-mole strategy in China which often proves futile in the long-term.
The United States faces persistent and increasingly sophisticated malicious cyber campaigns that threaten the public sector, the private sector, and ultimately the American people’s security and privacy.
This is all just the beginning, a little taste of what’s on the menu.
Collaborating with U.S tech companies to improve its efforts to identify, deter, protect against, detect, and respond to these actions and actors is now a must.
The Federal Government must also carefully examine what occurred during any major cyber incident and apply lessons learned.
Incremental improvements will not offer the security Americans need; instead, the Federal Government needs to make bold changes and significant investments in order to defend the vital institutions that underpin the American way of life.
It’s the authorities’ job and to offer resources to protect and secure its computer systems, whether they are cloud-based, on-premise, or hybrid.
The scope of protection and security must include systems that process data (information technology (IT)) and those that run the vital machinery that ensures our safety (operational technology (OT)).
Contracts will be signed with IT and OT service providers to conduct an array of day-to-day functions on Federal Information Systems. These service providers, including cloud service providers, have unique access to and insight into cyber threat and incident information on Federal Information Systems.
Increasing the sharing of information about such threats, incidents, and risks, and enabling more effective defense of agencies’ systems and of information collected, processed, and maintained by or for the Government are necessary steps to accelerating incident deterrence, prevention, and response efforts.
The executive order signed by Biden shows that within 60 days, the Director of the Office of Management and Budget will hash out “language for contracting with IT and OT service providers and recommend updates.”
The U.S. must take decisive steps to modernize its approach to cybersecurity and must increase the Federal Government’s visibility into threats while protecting privacy and civil liberties.
Money will be spent to accelerate movement to secure cloud services, including Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS); centralize and streamline access to cybersecurity data to drive analytics for identifying and managing cybersecurity risks; and invest in both technology and personnel to match these modernization goals.
Prioritizing money spent on addressing “critical software” will translate into huge paydays to many cloud providers and not just the big guys.
Most recently, The Central Intelligence Agency awarded its long-awaited Commercial Cloud Enterprise, or C2E, contract to five companies—Amazon Web Services (AMZN), Microsoft (MSFT), Google (GOOGL), Oracle (ORCL), and IBM (IBM).
No doubt they will be vying for more government procurement contracts since they already have one hand in the honey jar.
At a lower level, readers should consider buying cybersecurity companies Fortinet (FTNT), Palo Alto Networks, Inc. (PANW), and CrowdStrike Holdings, Inc. (CRWD), but these smaller names come with more volatility.
This event really anoints the impending future as the golden era of IT cybersecurity spend and it will never go back to what it once was.
Paying for IT protection is here for the long haul and this goes for private companies and public institutions.
Nearly 80% of senior IT and IT security leaders believe their organizations lack sufficient protection against cyberattacks despite increased IT security investments made in 2020 to deal with distributed IT and work-from-home challenges, according to a new IDG Research Services survey commissioned by Insight Enterprises.
There will be a huge boom in IT cybersecurity spend because CEOs don’t want to be the idiot that allowed cybercriminals to hijack their whole business.
That’s the fastest way to end a management career.
Last time I checked, it’s a hard slog up the corporate ladder to land a prime CEO gig and it’s not getting any easier.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-14 15:02:252021-05-21 00:04:48The Golden Era of Cybersecurity Spend
“Technology is a useful servant but a dangerous master.” - Said Norwegian historian, teacher, and political scientist Christian Lous Lange
https://www.madhedgefundtrader.com/wp-content/uploads/2021/05/lange.png702452Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-14 15:00:182021-05-14 19:55:57May 14, 2021 - Quote of the Day
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