“I wouldn’t want to see everyone get down to where Detroit is before we declare a bottom in residential housing,” said David Blitzer, former chairman of the S&P 500 Index Committee.
Global Market Comments
May 23, 2024
Fiat Lux
Featured Trade:
(BEHOLD THE POWER OF THE NVIDIA LEAPS)
(NVDA)
I know that most of you bought my recommendation on September 29, 2022, to buy the NVIDIA (NVDA) January 2025 $270-$280 out-of-the-money vertical Bull Call spread LEAPS at $0.50 or best, so I thought I’d give you an update.
Since I sent out this trade alert, (NVDA) shares have catapulted from $127 to $1,050, a gain of 8.27 times, or 827%. Today, the middle market for the LEAPS is $9.20, a gain of 18.4 times, or 1.840%. And this is a position where you never risked more money than you put up.
Those of you who bought this in size have already retired and will never work another day in their lives.
Such is the incredible power of LEAPS.
Of the 38 LEAPS I have issued over the past three years, 36 are at max profit. Only (UNG) and the last (TLT) are sucking hind tit. But they still have eight more months to run. The final bell has not been rung….yet.
There are many more LEAPS recommendations to come from the Mad Hedge Fund Trader. However, you will find I issue many more of these at market bottoms than tops. Timing is everything.
For your edification, I have included the original trade alert below.
Trade Alert - (NVDA) – BUY
BUY the NVIDIA (NVDA) January 2025 $270-$280 out-of-the-money vertical Bull Call spread LEAPS at $0.50 or best
Opening Trade
9-29-2022
expiration date: January 17, 2025
Number of Contracts = 1 contract
Keep in mind that NVIDIA is one of the most volatile stocks in the market. You don’t have to buy it today. A big selloff would be ideal. But it should be at the core of any long-term LEAPS portfolio.
If you are looking for a lottery ticket, then here is a lottery ticket.
While the chance of winning a real lottery is something like a million to one, this one is more like 2:1 in your favor. And the payoff is 19:1. That is the probability that NVIDIA shares will double over the next two years and four months.
Santa Clara-based NVIDIA designs and manufactures high-end, top-performing graphics cards or GPUs. There is probably one in your PC. They are essential in the artificial intelligence, automobile, PC, supercomputing, cybersecurity, and gaming industries.
They are also crucial for national defense. The Biden administration recently banned NVIDIA from exporting high-end chips and their manufacturing equipment to China, which they were using to build sophisticated weapons to use against us. This revenue loss is what has taken the shares down to their current low levels, down 65% in six months.
NVIDIA has long been one of the fastest-growing US companies, Since 2005, its annual net income has soared from $89 million to $9.7 billion. Its NVIDIA Titan V graphics processing unit used for supercomputing architecture sells for an eye-popping $2,999.
And before you ask, NVIDIA is an abbreviation for the Latin word for “envy.”
To learn more about the company, please visit its website at https://www.nvidia.com/en-us/
I am therefore buying the NVIDIA (NVDA) January 2025 $270-$280 deep out-of-the-money vertical Bull Call spread LEAPS at $0.50 or best.
Don’t pay more than $1.00 or you’ll be chasing on a risk/reward basis.
January 2025 is the longest expiration currently listed. 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 NVIDIA (NVDA) January 2025 $270-$280 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.50-$1.50. Enter an order for one contract at $0.50, another for $0.60, another for $0.70, 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.
Notice that the day-to-day volatility of LEAPS prices is minuscule 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 112% rise in (NVDA) shares will generate a 1,900% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 19:1 across the $270-$280 space.
(NVDA) doesn’t even have to get to a new all-time high to make the max profit. It only has to get back to $270 where it traded last March.
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 NVIDIA will not fall below $280 by the January 17, 2025 option expiration in 2 years and 4 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (NVDA) $270 calls at………….………$11.00
Sell short 1 January 2025 (NVDA) $280 calls at…………$10.50
Net Cost:………………………….…….…..…………...........….....$0.50
Potential Profit: $10.00 - $0.50 = $9.50
(1 X 100 X $9.50) = $950 or 1,900% in 2 years and 4 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.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
"I had no idea Amazon would produce this kind of performance. I blew it," confessed Oracle of Omaha Warren Buffett.
Global Market Comments
May 22, 2024
Fiat Lux
SPECIAL MASTER LIMITED PARTNERSHIP ISSUE
Featured Trade:
(THE REBIRTH OF THE MASTER LIMITED PARTNERSHIP),
(USO), (AMLP), (FPL), (MLPX), (WES), (ET)
There was probably no more broken promise in the investment world over the last several years than that energy master limited partnerships (MLPs) would hold up even if the price of oil fell.
These guys were toll takers, it was said, and profited from the volume of crude pumped through their pipelines. The price of oil was somebody else’s problem.
In any case, double-digit yields would provide more than ample support in any kind of sell-off.
It didn’t quite work out like that.
Once the price of Texas tea (USO) began its plunge in 2014 from $107 to negative $37 at the pandemic low, any investment tarred with an oil connection got slaughtered.
It was the classic flash fire in the movie theater.
Bids for MLP’s vaporized.
Making matters worse is that many retail investors bought highly leveraged MLPs on margin, turning 10% yields into 20% ones. When the sushi hit the fan, it didn’t take long for those positions to go to zero.
Most of the leveraged plays went bankrupt or were unwound in a variety of creative ways with enormous losses.
I always find it a useful exercise to sift through the wreckage of past investment disasters. Not only are there valuable lessons to be learned, but sometimes great trades emerge.
I have been doing that lately in the energy sector, a hedge fund favorite these days, and guess what?
MLPs are back. And no, I’m not talking about the Maui Land and Pineapple Company (MLP) (yes, there is such a thing!).
But these are not your father’s MLPs.
Let me start with my investment thesis.
It is always better to invest in an asset class that has its crash behind it (energy) than ahead of it (the US dollar).
And let’s face it, the final bottom for oil this year at $68 is in.
We may bounce around a bottom for a while as recession fears prevail. But eventually, I expect a global synchronized economic recovery to take it sustainably higher, $100 a barrel or better.
And while I have never been a fan of OPEC, they are showing rare discipline in honoring the production quotas negotiated in November.
That eliminates much of the downside from MLPs and makes it one of the more attractive risk/reward trades out there.
Except that this time it’s different.
Thanks to hyper-accelerating technology (yes, there’s that term again), new wells employ a fraction of the labor of the old ones and are therefore more profitable.
That means they can function, and even prosper, with a much lower oil price.
The surviving MLPs are now a much better quality investment.
Balance sheet quality has improved as a result of deleveraging in the last 14-18 months, and the worst of the rating downgrade cycle is likely behind us.
Importantly, some $50 billion‒$60 billion of growth opportunities for MLPs are expected during FY2024-2025.
That makes the industry one of the great secular growth stories out there today.
As an old fracker myself, I can tell you that the potential of the revolutionary new technology has barely been scratched.
Thanks to technology that is improving by the day, Saudi Arabia’s worth of energy reserves remains to be exploited, potentially turning the US into an energy-exporting powerhouse as the world’s largest producer at 13 million barrels a day.
Industry experts expect MLP distributions to grow by 3%‒5% annually over the coming years. Few other industries can beat this.
That means avoiding upstream Exploration and Production companies; where there is still a ton of risk, and placing your bets on midstream companies that operate pipelines.
And by midstream, I don’t just mean pipelines but also processing facilities for natural gas liquids and storage and terminal facilities.
You especially want to look at companies with high barriers to entry and attractive assets in high-growth and low-cost production regions. I’m all about big moats (see (NVDA)).
Companies with a sustainable cost advantage, operated by experienced management with proven geological are further pluses.
MLPs also stack up nicely as a diversifier for your overall portfolio.
Over longer time periods, MLPs have generated similar returns to equities, with similar to slightly higher levels of volatility.
Historically they have traded at lower yields than high-yield bonds, but currently, they are yielding 150 basis points more.
And now for the warning labels.
This is not a new story.
As you can see from the charts below, MLPs have been rallying hard since oil bottomed at the pandemic low in April 2020.
And if my oil forecast is wrong and we plumb new generational lows once again, investment in this sector will suffer.
Still, with yields in the 7%-10% range, a certain amount of pain is worth it.
Still interested?
Take a look at the Alerian MLP ETF (AMLP) (7.36%) and the Global X MLP Energy Infrastructure ETF (MLPX) (4.91%), Western Midstream Partners (WES) (9.20%), and Energy Transfer LP (ET) (7.96%).
Global Market Comments
May 21, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL)
(UPDATE ON THE (WPM) JANUARY 17, 2025 $42-$45 LEAPS)
Those were really great trade that just expired, the longs in gold (GLD) and silver (SLV) and the short in Microsoft (MSFT). I made some good money. Thankyou. Enjoy the weekend.
Richard
Fitchburg, Wisconsin
Standing Astride the Equator in Ecuador
For those of you fortunate enough to get into the January 17, 2025 $42-$45 vertical bull call debit spread LEAPS when I first recommended them ten months ago on July 25, 2023, you are now at 71% of your maximum potential profit. That means the LEAPS you bought for $1.40 last year is now worth $2.60, a gain of 85.71%.
If you are an active trader, you may want to take profits on the massive 20% rise in silver over the past 10 days. Metal producers are unable to rush supplies to the market fast enough to cover their shorts in the futures market, creating a massive short squeeze. These are conditions that most silver investors only dream about.
Long may it continue.
If you are cash-heavy, you may want to run this position eight more months into the January 17, 2025 option expiration and capture the full 114% profit over a total of 18 months. As long as silver prices stay over $45, this will be a big win.
For those new to the service, please find the full text of the July 25, 2023 trade alert below.
Mad Hedge AI
Trade Alert - (WPM) – BUY
BUY the Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS at $1.40 or best
Opening Trade
7-25-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
It's easy to see why AI picked this trade.
Look at the chart below and you see a perfect inverse head and shoulders in place. There is also a golden cross setting up in a month or so, with the 50-day moving average charging towards to 200-Day.
AI knows that human buyers love these things.
The entire interest rate-sensitive sector has been walloped over the last three months over fears that the Fed will keep interest rates higher for longer. That is now in the price of the gold miners.
This position is a bet that our nation’s central bank will embark on a path of interest rate CUTS sometime in the next 18 months. And the shares of Barrack Gold (GOLD) only have to return to where they were in March for the position to hit max profit.
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 (WPM) shares will rise over the next 18 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 possibly going to trigger a modest recession by the end of 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.
And guess which asset class is one of the most sensitive to falling interest rates? That would be precious metals, especially gold. A drop in interest rates of this magnitude should allow the price of Barrick Gold to double. That’s where we were in March of 2021 when (GOLD) traded at $30.
Another factor driving down interest rates is the fact that the US government budget deficit is shrinking at the fast rate in history, down from $3 trillion to $1.5 trillion in the past year. A shrinking supply of bonds brings higher bond prices and lower interest rates.
I am therefore buying the Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS at $1.40 or best.
Don’t pay more than $1.80 or you’ll be chasing on a risk/reward basis.
During bull markets in precious metals, silver historically rises 2.5 faster than gold.
Wheaton Precious Metals Corp is a Canadian multinational precious metals streaming company. It produces over 26 million ounces and sells over 29 million ounces of silver mined by other companies (including Barrick Gold and Goldcorp) as a by-product of their main operations.
The silver (WPM) has agreed to purchase is in Mexico (40%), Portugal (20%), USA (10%), Chile (9%), Peru (9%), Argentina (7%), Sweden (4%), Greece and Canada (about 1%). (WPM) doesn't own or operate the mines but the contracts it has with their owners give it full access to any silver (gold at the Minto Mine) mined there. For more about Wheaton Precious Metals (WPM), please visit their website by clicking here.
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 Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $1.00-$2.00, which is typical. Enter an order for one contract at $1.20, another for $1.30, another for $1.40, 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 (WPM) does NOT rise by 4.12% in 18 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 4.12% in the next six 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 ten 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 4.12% rise in (GOLD) shares will generate a 114% profit with this position, such is the wonder of LEAPS.
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 (WPM) will not fall below $45 by the January 17, 2025 option expiration in 18 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (WPM) $42 calls at………….………$9.00
Sell short 1 January 2025 (WPM) $45 calls at…….……$7.60
Net Cost:………………………….………..…........……….….....$1.40
Potential Profit: $3.00 - $1.40 = $1.60
(1 X 100 X $1.60) = $160 or 114% in 18 months.
“Gold is my cash. Over the long term it is not the best investment. But when you are having a monetary crisis it should be part of every portfolio,” said hedge fund legend, Ray Dalio of Bridgewater Associates.