Global Market Comments
April 5, 2023
Fiat Lux
Featured Trade:
(THE CODER BOOM)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)
CLICK HERE to download today's position sheet.
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down a small amount in price over a defined limited period of time.
It is the perfect position to have onboard during markets that have declining or low volatility, much like we experienced in 2014, and will almost certainly see again.
I have strapped on quite a few of these across many asset classes this year, and they are a major reason why I am showing positive performance numbers for 2016.
To understand this trade, I will use the example of an Apple trade, which I executed on July 10, 2014. I then felt very strongly that Apple shares would rally into the release of its new iPhone 6 on September 9, 2014.
The same play kicked in again for the iPhone 12 release last October.
So followers of my Trade Alert service received text messages and emails to add the following position:
Buy the Apple (AAPL) August 2014 $85-$90 in-the-money bull call spread at $4.00 or best
To accomplish this, they had to execute the following trades:
Buy 25 August 2014 (AAPL) $85 calls at...............$9.60
Sell short 25 August 2014 (AAPL) $90 calls at......$5.60
Net Cost:...............................................................$4.00
This gets traders into the position at $4.00, which cost them $10,000 ($4.00 per option X 100 shares per option contract X 25 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (August 15, 2014) and only different strike prices ($85 and $90).
The breakeven point can be calculated as follows:
$85.00 - Lower strike price
+$4.00 - Price paid for the vertical call spread
$89.00 - Break even Apple share price
Another way of explaining this is that the call spread you bought for $4.00 is worth $5.00 at expiration on August 15, giving you a total return of 25% in 26 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can't lose any more than the amount of capital you put up, in this case, $10,000.
If Apple goes bankrupt, we get a flash crash, or suffer another 9/11 type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like spreads so much.
As long as Apple traded at or above $89 on the August 14 expiration date, you would have made a profit on this trade.
As it turns out, my read on Apple shares proved dead-on, and the shares closed at $97.98 on expiration day or a healthy $8.98 above my breakeven point.
The total profit on the trade came to:
($1.00 profit X 100 shares X 25 contracts) = $2,500
This means that the position earned a 25% profit on your $10,000 investment in a little more than a month. Now you know why I like Vertical Bull Call Spreads so much. So do my followers.
Occasionally, these things don't work and wheels fall off. As hard as it may be to believe, I am not infallible.
So, if I'm wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money. On those rare occasions when that happens, I'll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
That stop loss is usually at the lower strike price when there is still a lot of time to run to expiration, as the position still has a lot of time value remaining, and the upper strike price when there are only a few days left until expiration.
The most I have ever lost on paper with one of these vertical bull call spreads was 50% of my capital, or $5,000 on a $10,000 investment. That’s because the trade was with both long and short options which maintain time value, no matter what the market does. I also never put more than 10% of my portfolio into a single position, so the paper loss on the entire capital was only 5%.
But that was on one of the worst days in market history when the Dow Average opened down 1,300 points. As it turned out, I kept my position and ended up making the maximum profit by expiration day.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your own online platform, please click here.
Vertical Bull Call Spreads Are the Way to Go in a Crazily Oversold Market
“If Carnival Cruise Lines (CCL) can raise $4 billion in the debt markets, why can’t American (AA) or United (UAL) do the same? Why stick it to the taxpayer?” asked my old friend, famed short-seller Jim Chanos.
Mad Hedge Biotech and Healthcare Letter
April 4, 2023
Fiat Lux
Featured Trade:
(IN IT TO WIN IT)
(HUM)
If you want to increase your chances of success in the stock market, forego complex formulas and algorithms. The process does not have to be rocket science. Instead of a complicated equation, remember the age-old saying, “Keep it simple.”
That means you should choose companies whose products and services make up the backbone of our economy, such as healthcare, technology, and energy.
Investing in healthcare stocks can offer a safe haven for your portfolio, no matter the economic climate. These essential goods and services are always needed by patients, so it pays to explore quality investments that will stand up over time.
Quality healthcare stocks can provide a reliable means for investors to capitalize on growing markets, and the insurance sector is an especially noteworthy opportunity.
As the world's population ages and healthcare costs continue to soar, health insurance is rapidly becoming a crucial necessity. That's why experts project a steady 7.1% annual increase in global health insurance industry revenue. By 2028, they project that revenue will have surged to nearly $2.6 trillion, up from $1.7 trillion in 2022.
These statistics underline the growing importance of investing in the health insurance sector, as it continues to expand and offer promising growth opportunities.
When it comes to capitalizing on the promising growth prospects in the health insurance sector, Humana (HUM) is a heavyweight contender.
Humana's roots date back to 1961 when it was founded in Louisville, Kentucky. Today, it stands tall as one of the largest insurance companies in America. Its specialty lies in providing government-subsidized plans, catering to Medicare Advantage, Medicaid, and Tricare (for the military).
With over 22 million members enrolled in its various plans, including medical, dental, and vision coverage, the company is well-positioned to reap the benefits of this burgeoning industry.
In fact, with a market capitalization of $64 billion, Humana is currently the fifth-largest health insurer globally.
As the demand for health insurance continues to grow, Humana's strong market position and broad range of offerings make it a compelling option for investors looking to tap into the sector's potential.
Humana's Q4 performance was a sight for sore eyes for investors, with revenue up 6.6% YoY to $22.4 billion. The company's medical membership grew by 0.1%, reaching 17.1 million, boosted by a 3.2% growth in Medicare Advantage membership.
Coupled with premium hikes, this led to an upward trend in Humana's revenue. The cherry on top was the non-GAAP diluted EPS of $1.62, reflecting a staggering 30.6% YoY growth rate.
Humana has a bright future ahead thanks to organic membership growth and strategic acquisitions.
Analysts predict the company's adjusted diluted EPS will compound at a rate of 14.3% annually over the next five years, outpacing the industry average of 12.4%.
While Humana's current 0.6% dividend yield may seem low compared to the S&P 500's 1.6%, the quarterly dividend per share has tripled over the last decade to $0.7875.
Plus, with a payout ratio of just 12% in 2022, there's plenty of room for future dividend increases. This means Humana can continue to invest in the business and strengthen its balance sheet while also rewarding shareholders.
If you're looking to get a real return on your investment, make sure Humana is in the mix.
With the company's growth prospects well above the industry average, this means that the stock is currently undervalued and is a prime candidate for those looking for some solid growth potential. So if you're in it to win it, now is the time to consider adding Humana to your portfolio.
Global Market Comments
April 4, 2023
Fiat Lux
Featured Trade:
(Trade Alert - (TLT) LEAPS – BUY)
(TLT)
CLICK HERE to download today's position sheet.
BUY the United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call spread LEAPS at $2.50 or best
Opening Trade
4-4-2023
expiration date: February 16, 2024
Number of Contracts = 1 contract
A $10 selloff in the (TLT) is a great entry point for a LEAPS. This is a gift from the US House of Representatives which is threatening to throw the entire government bond market into default by summer.
If you are a trader, default threats are where you BUY bonds.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is a double in little more than a year. That is the probability that (TLT) shares will rise by only 3.32% over the next 12 months.
The logic behind this LEAPS is fairly simple.
After keeping interest rates too low for too long, then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.
The rate of interest rate rises has been the most rapid in history and is certain to trigger a recession in 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures. That’s where we were last April and will take the (TLT) at least back up to $120.
I am using the very conservative $100-$105 strike price in case bonds continue bouncing along a bottom before turning in a few months. If a double in a year is not enough for you, perhaps you should consider another line of business.
I am therefore buying the United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call spread LEAPS at $2.50 or best.
Don’t pay more than $3.00 or you’ll be chasing on a risk/reward basis.
I am going out to only a February 16, 2024 expiration because I think this trade will work fairly quickly with a 2023 recession, even a mild one.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call spread LEAPS at $2.50 or best are showing a bid/offer spread of $2.00-$3.00, which is typical. Enter an order for one contract at $2.00, another for $2.10, another for $2.20 and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if the (TLT) does NOT rise by 3.32% in 12 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work, you triple your money.
You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.
There is another way to cash in. Let’s say we get half of your double in the next three months which, from these low levels, is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full five bagger. It’s a nice problem to have.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 3.32% rise in (TLT) shares will generate a 100% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 30:1 across the $100-$105 space.
If you want to get more aggressive, you can buy the United States Treasury Bond Fund (TLT) February 2024 $115-$120 out-of-the-money vertical Bull Call spread LEAPS for $1.00, giving you a potential profit of 400%. I can do this trade and sleep at night. I’m not so sure about you.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that the (TLT) will not fall below $105 by the February 16, 2024 options expiration in 10 months.
Here are the specific trades you need to execute this position:
Buy 1 February 2024 (TLT) $100 calls at…………..………$7.00
Sell short 1 February 2024 (TLT) $105 calls at…..………$4.50
Net Cost:………………………….………..…..........……….….....$2.50
Potential Profit: $5.00 - $2.50 = $2.50
(1 X 100 X $2.50) = $250 or 100% in 10 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
“Our clients used to think in weeks and days. Today, it’s not even hours-- they think in minutes,” said John Schutz of Wells Fargo, the largest financial advisor in Minnesota, with $1.2 billion in assets.
Mad Hedge Technology Letter
April 3, 2023
Fiat Lux
Featured Trade:
(BULL CASE FOR NVIDIA)
(NVDA), (AI), (GPU)
Investors looking at taking their investing futures by the scruff of the neck need to look no further than pouring capital into chip stock and a company that will be integral in building generative artificial intelligence technology Nvidia (NVDA).
The stock has muscled itself higher in 2023 doing a double in about 4 months.
Shares were languishing around $140 at the turn of the year, but have gone ballistic on its way to almost $280.
What was the trigger to such a short-term bull run?
Investors have bought into the hype around generative artificial intelligence (AI) applications such as chatbots, which could trigger the need for thousands of graphics processing units (GPUs) - a market that's dominated by the chipmaker.
But the stock's extraordinary rally has made it quite expensive from a valuation perspective.
Sadly, PC shipment forecast is grim as well for 2023. PC shipments this year expect to come in at 260.8 million units, which would be a 10.7% decline over last year.
Nvidia sells graphics cards that go into personal computers and workstations.
The PC market's woeful performance in 2022 - when shipments declined a startling16.5% from 2021 - led to a collapse in Nvidia's gaming and professional visualization segments. Gaming revenue was down 27% in fiscal 2023 to $9 billion as sales of graphics processing units (GPUs) used by gamers dried up. Professional visualization revenue also declined 27% to $1.54 billion.
Nvidia's channel partners were left with excess graphics card inventory on account of weak demand.
Revenue is expected to increase by almost 10% to $29.6 billion, but a gloomy forecast indicates that the restocking of graphics card inventory may not happen soon.
The headwinds in a sizable chunk of Nvidia's businesses, when combined with its rich valuation, strengthen the case against investing in the company.
New catalysts such as generative AI applications could give the data center business a turbocharge effect.
For instance, market research firm TrendForce estimates that ChatGPT may eventually require more than 30,000 GPUs from Nvidia to cater to the huge demand. Given that each Nvidia data center GPU can cost between $10,000 and $15,000, the company could generate substantial revenue from supplying its graphics cards for powering chatbots such as ChatGPT.
Also, as many tech giants are now in a race to develop chatbots, Nvidia could turn out to be the biggest winner related to this industry.
That's because Nvidia leads the data center GPU market, with a share of over 90%. That puts it in pole position to take advantage of the chatbot market, which is expected to register annual growth of 30% over the next five years.
The bottom line is that the AI opportunity could send Nvidia stock higher in the long-term.
They continue to be one of the leading lights of the tech industry intersecting across a number of leading and meaningful sub-sectors.
However, I would wait for a small dip to dollar cost average into shares because the price action has gone a little too fast and too furious in the short-term.
