The earth has been playing in heavy traffic for 4 billion years now,
said Jeffrey Klugger, science editor of Time Magazine
Global Market Comments
February 8, 2024
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (PANW), (V), (GOOGL), (CCJ)
I was awoken this morning by calls from Concierge members asking what to do when their Visa (V) options were assigned or called away. The answer was very simple: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
We have the good fortune to have five option call spreads that are deep in the money going into the February 16 option expiration. They include:
(MSFT) 2/$330-$340 call spread
(AMZN) 2/$130-$135 call spread
(V) 2/$240-$250 call spread
(PANW) 2/$260-$270 call spread
(CCJ) 2/$38-$41 call spread
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
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 Visa (V) February 2024 $240-$250 in-the-money vertical BULL CALL debit spread.
For what the broker had done in effect allows you to get out of your call spread position at the maximum profit point 8 trading days before the February 16 expiration date. In other words, what you bought for $8.80 on January 10 is now $10.00!
All have to do is call your broker and instruct them to exercise your long position in your (V) February 2024 $240 calls to close out your short position in the (V) February 2024 $250 calls.
This is a perfectly hedged position, with both options having the same expiration date, and the same amount of contracts in the same stock, 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 option contract is exercisable into 100 shares.
To say it another way, you bought the (V) at $240 and sold it at $250, paid $8.80 for the right to do so, so your profit is $1.20 or ($1.20 X 100 shares X 12 contracts) = $1,440. Not bad for a 26-day defined limited-risk play.
Sounds like a good trade to me.
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 (V) position after the close, and exercising his long February $240 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 that may arrive at some twisted logic that the calls 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 make mistakes.
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. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates oodles of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they did train 50 years ago.
Avarice could have been an explanation here but I think stupidity, poor training, and low wages are much more likely.
Brokers have so many legal ways to steal money 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.
Calling All Options!
Global Market Comments
February 7, 2024
Fiat Lux
Featured Trade:
(DUMPING THE OLD ASSET ALLOCATION RULES),
(WHY WATER WILL SOON BE WORTH MORE THAN OIL)
What to do about asset allocation is the one question that I get every day which I absolutely cannot answer.
The reason is simple: no two investors are alike.
The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, in the top or the bottom tax bracket, and so on.
This is something you should ask your financial advisor if you haven’t fired him already, which you probably should.
Only advisors who read the Diary of a Mad Hedge Fund Trader should merit your attention. At least they’re going the extra mile trying to figure things out.
Having said all that, there is one old hard and fast rule, which you should probably dump.
It used to be prudent to own your age in bonds. So, if you were 70, you should have had 70% of your assets in fixed income instruments and 30% in equities.
Given the extreme overvaluation of all bonds today, and that we are probably just entered a 7-10 year bull market for stocks, I would completely ignore this rule.
Instead, you should probably run a 50/50 portfolio, half in bonds and half in growth stocks. You can get 7% a year or more in yields these days in junk bonds and get a great inflation hedge to boot.
You will also own what everyone else in the world is trying to buy right now, high growth US stocks.
Allocation: Are You Him?
Or Him?
Global Market Comments
February 6, 2024
Fiat Lux
Featured Trade:
(Trade Alert - (JPM) – LEAPS EXPIRATION)
EXPIRATION of the JP Morgan (JPM) January 2024 $130-$135 at-the-money vertical Bull Call spread LEAPS at $5.00 or max profit
Closing Trade
1-19-2024
expiration date: January 19, 2024
Number of Contracts = 1 contract
I am running through the expiration math on this LEAPS trade for you because we are going to do many more of these this year, so It’s important that you understand it.
Those who did this trade last March and then threw up on their shoes were paid big time for their discomfort. On January 19, the JP Morgan (JPM) January 2024 $130-$135 at-the-money vertical Bull Call spread LEAPS expired at the $5.00 max profit. Investors earned a handsome $250 or 100% in 9 months for each contract they owned.
(JPM) is the class act in the global banking sector, and CEO Jamie Diamond is the best CEO in the country. The regional banking crisis pulled forward any recession and therefore the recovery.
There will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
And here is the sweet spot. Fears of a recession increasing loan default rates knocked $20, or 14% off the $145 high in (JPM) shares last year. When recession fears faded in 2023 interest rates remained historically high and (JPM) profits and the share price rocketed.
To learn more about the company please visit their website at https://www.jpmorganchase.com
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.
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.
This was a bet that JP Morgan would not fall below $135 by the January 19, 2024 option expiration in 9 months.
Here is the specific accounting you need to close out this position:
Expiration of 1 January 2024 (JPM) $130 calls at……...…$40.31
Expiration of short 1 January 2024 (JPM) $135 calls at…$35.31
Net Proceeds:……….………………….………..………….…..........$5.00
Profit: $5.00 - $2.50 = $2.50
(1 X 100 X $2.50) = $250 or 100% in 9 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 at
https://www.madhedgefundtrader.com/ltt-vbcs/
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.
Global Market Comments
February 5, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE DOTCOM BUBBLE PART II),
(NVDA), (MSFT), (AMZN), (META), (GOOGLE), (FDX)
I remember back in 1990 when I was first starting my hedge fund in London England, one of the very first. I hired two Ph.D.’s in Mathematics from Cambridge University, and we started inventing one the first purely quantitative approaches to the stock market. We were playing around with statistical probability arbitrage and Monte Carlo simulations, things like that.
One day, one of my guys said he needed to buy a software patch from a company in Los Angeles. I said “Sure" thinking we could pay up and overnight some floppy discs via a new company called Federal Express (FDX). He said no need, he could simply download them.
I said what?!
Andrew proceeded to connect to the Internet with our screechy landline modem and pay for the software with my American Express card. I watched in utter amazement as the time bar turned green and we got our patch.
I thought “Holly Smokes!”
I immediately realized that this technology was going to change the global economy beyond all recognition and send the stock market soaring. I also realized that I had to move my company out of our leafy West London neighborhood to the peach orchards of Silicon Valley as soon as possible to get in on the ground floor. I did this over a weekend care of, you guessed it, Federal Express. Thank goodness my guys were single.
I then called the Head of Research at Normura Securities in Tokyo and informed him of the incredible power of the Internet, and that in five years, Normura would distribute all of its research online, completely eliminating paper. He said I was out of my mind. I was wrong. In the end, it took Nomura ten years to move to online-only research, vastly improving the profitability of the company.
Over the last month, I have realized that we are seeing a repeat of that magical 1990 “aha” moment. We are only one year into Dotcom Bubble Part II, which has several more years to run. Remember when Fed Chairman Alan Greenspan warned of “irrational exuberance” in December 1996? Technology stocks rocketed for 3 ½ more years, wiping out several hedge funds on the short side along the way.
Think of it as 1997 again. Now, if I can only get my 1997 hair back!
Need any further convincing? Today, graphics card maker NVIDIA (NVDA) is selling at a forward multiple of 20X earnings. In 2000, this type of stock (Cisco Systems, Yahoo, Dell Computer) was selling for 100 times earnings. Add a 2X multiple expansion and a 5X multiple expansion and you get a 10X growth in the lead stock prices in coming years.
The net, net of all this is that the most expensive stocks in the market are not really expensive, but the cheapest. Overbought? Technically insane? Doubled in a year?
Buy em!
For AI, five will continue dominating the market for the foreseeable future. The top five AI stocks are showing an average 60% profit gain in Q1. The remaining S&P 494 are showing a 10% loss. It is a 1990s Dotcom Bubble repeat in miniature. These stocks have gained $5 trillion in market value in only three months, and there is more to come.
What are these companies doing right? They developed the greatest new income streams in history, while at the same time carrying out the most ferocious cost-cutting efforts. The effect on profits is astronomical. It’s like they spent the last 10-40 years preparing for this one moment. Look no further than Meta (META), which cut staff from 87,000 to 67,000, tripling net income to $14 billion, and doubling the share price.
It will be a recurring story.
On a completely different topic, hedge funds are pouring into India once again as the next China. It has the world’s best demographic curve, with an average age of only 20 years old, meaning that in 20 years it will have the most big spending consumers. It has the world’s fastest-growing Services PMI. It is also the most populous country in the world, topping 1.4 billion, exceeding China.
Apple (AAPL), Tesla (TSLA), and many other Western companies are looking to expand there. You always follow direct investment as the head of JP Morgan’s investment division once told me. Buy the (INDA) and the (INDY).
So far in February, we are up +2.04%. My 2024 year-to-date performance is also at -2.24%. The S&P 500 (SPY) is up +5.10% so far in 2024. My trailing one-year return reached +60.43% versus +20.48% for the S&P 500.
That brings my 16-year total return to +674.39%. My average annualized return has recovered to +51.21%.
Some 63 of my 70 trades last year were profitable in 2023.
I am maintaining longs in (MSFT), (AMZN), (V), (PANW), and (CCJ).
The Fed Turns Dovish, with all members expecting the next move to be a rate cut. It’s just a matter of how much, and how soon, but March was taken off the table. All bearish content from the Fed statement was removed. A classic “Buy the rumor, sell the news type of move. Look for a multi-week to one-month correction in tech, then a new rally.
US Treasury Borrowing to Hit $760 Billion in Q1, some $55 billion less than expected. Q2 then drops to only $202 billion. Bonds rallied on the good news. Buy (TLT) on dips.
S&P Case Shiller National Home Price Index Falls, in November for the first time in nine months. Detroit reported the highest year-over-year gain among the 20 cities, with prices rising 8.2% in November, followed again by San Diego with an 8% increase. Seattle and San Francisco reported the largest monthly declines, falling 1.4% and 1.3%, respectively. This was back when mortgage rates were peaking at 8.0%.
Saudi Arabia Cuts Oil Production Targets, cratering prices and destroying the entire energy sector. Lack of demand, especially from China, is the reason. New US output is fuel on the fire. Production will be throttled back a million barrels to 12 million barrels a day as a long-term goal. It couldn’t happen to a nicer bunch of people.
Microsoft Beats estimates the steady growth of its Azure cloud business, but the shares dropped. Revenue in the second quarter, which ended Dec. 31, rose 18% to $62 billion, while profit was $2.93 a share, the company said in a statement Tuesday. Azure cloud-services sales gained 30%. Buy (MSFT) on dips.
Biden to Announce Massive Chip Subsidies, to head off a coming shortage driven by AI. The coming announcements are aimed at kick-starting the manufacturing of advanced semiconductors that power smartphones, artificial intelligence, and weapons systems. The $43.5 billion to be spent also has national security implications in moving semiconductor manufacturing from China back to the US. Buy all semiconductor plays. It’s free money for them.
It's the 16th Year Anniversary of the Mad Hedge Fund Trader, and what a long and winding road it has been. Going into the 2008 crash, several investors pulled out of a new hedge fund I was starting because of cash calls so I decided to go into the newsletter business instead. Thanks for your 16 years of your support. We now publish 24 newsletters a week and run summits every three months with a global staff of 15.
My Ten-Year View
When we come out the other side of any recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, February 5, at 8:30 AM EST, the ISM Services PMI is announced.
On Tuesday, February 6 at 8:30 AM, the Total Household Debt is released by the Federal Reserve Bank of New York.
On Wednesday, February 7 at 2:00 PM, the US Imports and Exports are published. We also get the latest car data.
On Thursday, February 8 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, February 9 at 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I’ll never forget when my friend, Don Kagin, one of the world’s top dealers in rare coins, walked into my gym one day and announced that he made $1 million that morning. I enquired “How is that, pray tell?”
He told me that he was an investor and technical consultant to a venture hoping to discover the long-lost USS Central America, which sunk in a storm off the Atlantic Coast in 1857, heavily laden with gold from the California gold fields. He just received an excited call that the wreck had been found in deep water off the US east coast.
I learned the other day that Don had scored another bonanza in the rare coins business. He had sold his 1787 Brasher Doubloon for $7.4 million. The price was slightly short of the $7.6 million that a 1933 American $20 gold eagle sold for in 2002.
The Brasher $15 doubloon has long been considered the rarest coin in the United States. Ephraim Brasher, a New York City neighbor of George Washington, was hired to mint the first dollar-denominated coins issued by the new republic.
Treasury Secretary Alexander Hamilton was so impressed with his work that he appointed Brasher as the official American assayer. The coin is now so famous that it is featured in a Raymond Chandler novel where the tough private detective, Phillip Marlowe, attempts to recover the stolen coin. The book was made into a 1947 movie, “The Brasher Doubloon,” starring George Montgomery.
This is not the first time that Don has had a profitable experience with this numismatic treasure. He originally bought it in 1989 for under $1 million and has made several round trips since then. The real mystery is who bought it last? Don wouldn’t say, only hinting that it was a big New York hedge fund manager who adores the barbarous relic. He hopes the coin will eventually be placed in a public museum. In 2021, the Brasher Doubloon sold at auction for $9.36 million.
Mad Hedge followers should start paying more attention to gold which I believe just entered another decade-long bull market, thanks to falling US interest rates. You can’t go wrong buying LEAPS in the top two miners, Barrack Gold (GOLD) and Newmont Mining (NEM).
Who says the rich aren’t getting richer?
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 2, 2024
Fiat Lux
Featured Trade:
(Trade Alert - (IBKR) – EXPIRATION)
