“If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food and gold bars.” – Said Economist Nouriel Roubini
(OPTION STRIKES: WHY WE CHOOSE A PARTICULAR STRIKE)
January 29, 2025
Hello everyone
What strikes do I choose and why
Strike prices refer to the specific price you can buy or sell an underlying stock when exercising an option contract. In other words, it’s the fixed price defined within an option that determines whether you can profit based on the current market price of the underlying asset, categorized as “in the money”, “at the money”, or “out of the money” depending on its relation to the current market price.
“In the Money”
If the current market price is higher than the strike price, the option is considered “in the money”. When putting your strikes “in the money” you are being more conservative.
“At the Money”
If the current market price is equal to the strike price. This is also a conservative stance.
“Out of the Money”
If the current market price is below the strike price, the option is considered “out of the money” and has no intrinsic value. When putting your strikes “out of the money” you tend to be more aggressive in your approach and taking on a bit more risk.
What is intrinsic value?
In options trading, “intrinsic value” refers to the immediate profit an option holder would gain if they exercised the option today, which is calculated by subtracting the strike price from the current market price of the underlying asset.
So, for example, if a stock is trading at $100, and a call option has a strike price of $90, the intrinsic value of that call option would be $10 ($100-$90).
Only options that are currently “in the money” have intrinsic value.
The total price of an option (premium) is made up of intrinsic value and time value (extrinsic).
Implied Volatility
IV is the level of volatility embedded in the option price. Generally speaking, the bigger the stock movements, the higher the level of implied volatility. Most stocks have different levels of implied volatility for different strike prices. John often uses this volatility in his option trading decisions. He often trades Tesla because of the high volatility and sends out “in the money” trade alerts.
If the stock has very low implied volatility, you should avoid going for “out of the money” option strikes.
PORTFOLIO UPDATE
Nvidia lost around $600b in value in one day this week. That’s a pretty hefty number. And it was all because of one headline that completely freaked investors out.
I would be looking to take some profits on this stock, as I don’t think it has found a bottom yet and could have further to fall.
We have done well on this stock, so it is wise to lock in some profits now.
Recommendation: Take at least 50% of profits on Nvidia stock.
MY AIRBNB EXPERIENCE IN THE U.S.
Last week I gave an insight into some of my experiences with Uber drivers in the U.S. and what their outlook was.
Today, I’m going to talk about Airbnb and my experience with this company, and the hosts I have encountered throughout the U.S.
Airbnb is not everyone’s cup of tea. Particularly if you are staying in a room in someone’s home. A myriad of rules are put before you as though you were staying in some sort of compound. For anything you break or ruin, there is always a dollar penalty. Loud noise or parties are out of the question. Not that I was indulging in any of that frivolity. But, at times it can seem a bit constricting and somewhat unsettling. Furthermore, at a couple of places I was not able to use the kitchen, so had to resort to prepared food, which was not always enticing.
My experience sharing the home with one family was quite interesting. This lady had a couple of her adult children living with her at home as well as one grandchild. Her adult children did not seem to work, and I didn’t ask why. She smoked and had a smoker’s cough. I noticed she had a tin of air freshener on a side table in the family room and often used it to attempt to hide the smell of smoke. At other times I witnessed her waving the smoke away with her arm. None of these worked.
She appeared quite disgruntled with the world and would talk to me for what seemed like a long time about the state of the U.S. She almost religiously listened to all sorts of political podcasts and watched programs focused on the possibility of extra-terrestrial beings. She was a staunch Democrat and had expressed her alignment by putting up large photos of the Democrat candidate – Kamala Harris - at the front of her home. This was a trend I saw throughout the neighbourhood. So, it became obvious which candidate each home supported as larger-than-life photos were erected in the front yard or just near their front door. (In Australia, we have photos of candidates erected in strategic locations on footpaths before an election, but I have never seen households expressing their support for one or the other candidate by putting up large photos in their front yard. We don’t hero-worship our leaders like the U.S. does. We are more concerned with the environment than putting a leader on a pedestal. To Australians, the Prime Minister has a job to do, so he should just get on with it and do it. No fanfare needed).
Anyway, at this home I was usually always the first person up in the morning. I emptied the dishwasher and washed up a pile of plates that sat in the sink. Then I made my morning cup of tea and went to work.
On occasion, I also cooked them some homemade treats, such as biscuits, and slices. They were all demolished in a very quick time, almost as though they had never tasted a home-cooked treat. I must say it was great to be able to use a kitchen to make my meals.
One conversation we had focused on the bookings she was getting for her Airbnb room. She said that bookings had begun to slow, and she didn’t know why. She almost answered her own question by arguing that the U.S. now had a variety of accommodations for visitors, that were not necessarily hotels, so this may impact Airbnb long-term.
At another Airbnb, where I had a room in a family home, the host was a Chinese lady. She had three bedrooms upstairs, and two were left for Airbnb visitors. Another room was for storage. This lady – let’s call her Kathy - chose to sleep on a mattress on the floor in a corner of her living area, which was sectioned off with a sheet or some cloth that was hanging from a partition. Her husband had died a few years ago, and this provided a good income for her. She owned a home back in China but said she was not likely to return. Her son had been educated at a private university in the U.S. and worked as an interpreter and commentator on U.S./China international affairs. He highlighted events happening in China, that many people were not aware of, and drew attention to human rights abuses that were commonplace throughout China. I met him once. He was very well-spoken and said he would never go back to China.
Kathy had a Green Card, but she didn’t hold a U.S. passport. She seemed anxious about life in general; she had a car but never used it, she said she didn’t ever travel. She had her groceries; fruit & vegetables delivered and never ate any fast food. At one sitting I saw her eat a bowl of mixed green leaves. No dressing. She drank water – no tea or coffee. She knew I liked tea, so she would boil the kettle when she heard me get up in the morning and would place a nice cup and saucer & teabag on the dining table for me to use.
She often talked to me about China and how restrictive it was. She commented that if you were heard to be making disparaging comments about China, the government, or the country’s policies in general, you were often called upon to visit a special government office and explain your comments to see if they could help you better understand your position, and how you should be thinking, in some way. Seems like you can’t trust your neighbours in China. And Kathy pointed out that fact. She said the Chinese were very distrustful of each other but were more likely to trust a foreign visitor. She said the freedoms in America were taken for granted.
My Chinese Host
Anyway, I’ll end off here with a brief observation of and exchange with a hotel employee. He brought my luggage up to my room. I asked him about the hotel, and he described what was available at the hotel. I asked him how long he had been working at the hotel. He said a few years. He seemed very disillusioned with the world. His face looked drawn, and his non-verbal communication betrayed a brow-beaten experience. He had worked in the corporate world and called it a dog-eat-dog environment, where you have no friends. He was obviously well educated as he said he spoke a couple of languages. He was not in his later years, but he moved slowly and was looking forward to retirement on a ranch far away from suburbia. I gave him a tip and wished him luck.
Cheers
Jacquie
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Global Market Comments
January 29, 2025
Fiat Lux
Featured Trade:
(WHY GLOBALIZATION WORKS)
Having been a vociferous supporter of globalization since its dawn, first during a decade spent as a reporter for The Economist magazine, and then as an investor, I can explain how our international trading system works, and especially why it works for the US.
While waiting for a flight at Miami Airport, there was a polyglot of travelers from all over the world.
Large groups of Chinese were led by flag-bearing guides. Italian Millennials mobbed the bars at night. English couples strolled the majestic limestone fortress walls soaking up the sunshine.
There was even the occasional American student backpacker repeating my own adventure from the 1960’s.
And you know what? This disparate international group shared many things in common.
Most of them spent much of the day glued to iPhones or Androids run by US-designed apps. Many were staying in accommodations organized by Airbnb (there were over 200 listings for the immediate Dubrovnik area).
They may have made the trip from the airport in an Uber cab. They wore Levis Strauss blue jeans. American pop music pulsed through their earbuds. Probably half of them arrived on a Boeing jet financed by the US Export-Import Bank.
In short, they were all sending enormous amounts of money to US companies and shareholders in more ways than they could possibly count, without realizing it.
You never used to see tourists from most countries, like Russia, Spain, Portugal, Italy, or Ireland.
They were too poor.
Rapidly rising standards of living created by globalization changed all of that, creating an enormous new market for American products, especially technology ones.
My Airbnb neighbors in Dubrovnik included a family from Malaysia and a young couple from South Korea.
You can see some of this impact in international balance of trade statistics. In 2024, the US ran a trade deficit with the world of $634 billion with consumer electronics, oil, clothes, and cars our largest imports.
Subtract our $294 billion surplus in services, which includes, financial services, education, patents, and other intellectual property, and that brings our current account deficit down by more than half to only $340 billion.
But that doesn’t tell the whole story.
Trade data completely misses the enormous number of products and services that are now given away FOR FREE in exchange for the chance of earning some uncertain revenue at some future date.
And I include none other than the esteemed Mad Hedge Fund Trader in this category. Something like 99% of the visitors to my site never pay anything.
The monetary market value of the research I have given away for free is probably worth tens of millions of dollars.
In a pre-Internet, pre-globalized world, a service covering so many asset cases and individual stocks in real-time might have cost $100,000, if not $1 million.
And you know what? It would have been worth it!
Multiply this effect on a global scale and you see what I am talking about.
Give up your name and email address, and you can obtain almost any kind of online service for nothing. And as far as I know, no government agency has any measurement of this whatsoever.
Needless to say, the United States is far and away the leader in this immeasurable field.
By the way, this might also be the reason why the published productivity data has been so poor, despite the fact that US GDP has grown by 20% since 2009. Everywhere I look productivity is skyrocketing, including my own.
It also might be the reason why Amazon continuously sports a nosebleed valuation. Much of what they provide is FREE, and therefore immeasurable.
Of course, globalization wrought havoc on your life if you went into it with the wrong job in the wrong industry and an inadequate skill set.
Blue-collar workers tied to textiles, shoes, toys, and other low-value-added manufacturing were toast, as their jobs fled offshore.
If you didn’t retrain, or adapt you became an angry, mostly white man.
As my friend, New York Times columnist Tom Friedman likes to say, “Average doesn’t cut it anymore.”
However, while the jobs are gone, the bulk of the profits stayed here in the US. American companies offshored the $ 2-an-hour jobs (mass assembly) but kept the $100 an hour ones (design and marketing).
As my friends in the Chinese government never fail to point out, if they build the iPhone for $100 and we sell it for $1,500, we are the big winners, not them.
They believe we are perpetuating 19th-century colonialism by making wage slaves of their workers.
They may be right.
Globalization enables the US dollar to continue as the world’s reserve currency, as almost all international trade is conducted in the buck.
That is one of the greatest free lunches of all time. It enables the US government to indirectly control the global economy through its own monetary policy. Some half of all US government debt is owned by foreigners.
When sanctions forced Iran to drop out of the international trading system what did they get? A Great Depression that cut their GDP by 25%. You can’t run a country of 80 million with oil barter deals, gold, and bitcoins alone.
There are also the huge defense benefits that globalization brings us.
Back in the early days, the main reason to steer a country into capitalism was to prevent it from going communist, and therefore becoming an enemy.
Grow your allies and shrink your enemies, and your defense costs shrink dramatically, raising our standard of living.
That is what has happened.
Increased trade also boosted foreign standards of living, therefore creating a growing market for American goods and services.
This was the whole point of the World Trade Organization, NAFTA, and the Trans-Pacific Partnership.
Humans rarely bite the hands that feed them. They are also highly unlikely to set fire to their paycheck or bomb the sources of income.
Make a foreigner a millionaire, and you turn him into a pacifist. I have seen this unfold time and again over the past half-century, be it in China, Russia, Vietnam, Cambodia, and most recently in Iran.
Create an embedded base of businessmen in any country who are getting rich off of you, and international relations invariably improve.
Any system based on greed is guaranteed to succeed.
A side benefit of all of this is that stock markets for up forever.
Since globalization started in earnest in 1951, the Dow Average has risen from $239 to $18,392, a prodigious gain of some 77-fold.
And you wondered why?
Globalization is the mechanism through which America is paid the dividend for all of the good deeds it has done and inventions it has created for the past century.
I am thinking about the construction of the Panama Canal, Lend Lease, and the Marshall Plan, as well as the transistor, memory chip, microprocessor, personal computer, Windows, the Internet, online commerce, the iPhone, and social media.
That is why globalization is a win-win-win for everyone.
There are really only two true communist countries left in the world, Cuba and North Korea, which never joined the international trading community. They also happen to have the planet’s lowest standard of living.
And Cuba will become totally capitalist within two years. Just give them a million iPhones, get them talking, and see what happens. Castro will become just another neighborhood in South San Francisco.
So why end a trading system from which America and its people have profited so mightily?
Exploring the Wonders of International Trade
“We have few, if any spare tires left,” said Mohamed El-Erian, CIO of mega bond house PIMCO, about the nail studded road ahead for the US economy.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Biotech and Healthcare Letter
January 28, 2025
Fiat Lux
Featured Trade:
(READY, RESET, GO)
(JNJ), (AAPL), (PFE), (ABBV), (RHHBY), (AZN), (SNY), (NVS)
I had to laugh when I saw Johnson & Johnson's (JNJ) Q4 earnings hit my screen earlier this month.
Here we have Wall Street wringing its hands over a slight revenue miss, sending shares down 3.5%, while management is busy plotting its path to pharma industry dominance.
The numbers tell an interesting story.
Q4 revenues grew 5.3% (or 5.7% on an adjusted operational basis) to $22.5 billion. Wall Street got the vapors because earnings came in at $1.41 per share, well below their $2.04 consensus.
Reminds me of the time analysts completely missed Apple's (AAPL) transformation into a services company.
For the full year 2024, JNJ delivered 4.3% sales growth (5.4% operational) to $88.8 billion, with earnings per share landing at $5.79, or $9.98 adjusted after swallowing a $(0.67) hit from acquired IPR&D charges.
Not too shabby for a company in transition.
Looking into 2025, management is guiding for 2.5-3.5% operational sales growth ($90.9-91.7 billion) and adjusted operational EPS of $10.75-$10.95.
That's 8.7% growth at the midpoint, though they're careful to hedge around legal proceedings and acquisition costs.
And here's where it gets interesting.
During last week's JP Morgan Healthcare Conference, CEO Joaquin Duato was practically bouncing in his chair about their drug pipeline. Let's look at what's got him so excited.
Darzalex, their multiple myeloma superstar, raked in $11.67 billion in 2024, up 20%.
The new kid Carvykti exploded 93% higher to $963 million. Tecvayli landed $550 million in its rookie year.
Depression med Spravato jumped 56% to hit the magic $1 billion mark. Tremfya, their Stelara successor, grew 17% to $3.7 billion.
Speaking of Stelara – there's the elephant in the room.
JNJ's crown jewel is losing patent protection, already showing up in Europe with a >12% sequential decline in Q4 to $2.35 billion. Expect a 30% "haircut" this year.
But here's what Wall Street is missing: JNJ saw this coming years ago.
They just dropped $14.6 billion on Intracellular Therapies, mostly debt-funded (they can afford it with only $31.3 billion in long-term debt and $19.98 billion in cash).
This brings them Caplyta, an antipsychotic med with blockbuster potential that's already approved for schizophrenia and bipolar disorders.
The medical device business isn't sitting still either.
Q4 worldwide revenues jumped 6.7% year-on-year. While Surgery was flat at $2.5 billion and Orthopedics grew a modest 2.5% to $2.32 billion, Vision popped 9% to $1.3 billion.
But the real story? Cardiovascular surged 24% to $2.1 billion. Those Shockwave and Abiomed acquisitions are looking pretty smart right about now.
For the year, MedTech grew 4% to $31.56 billion. Operating margins slipped a bit – Innovative Medicines down from 42% to 39.4%, MedTech from 23.7% to 21.6%.
Late-stage pipeline products nearing approval should ease R&D expenses in 2025, just as JNJ gears up for its next growth phase.
The foundation looks rock solid - $19.98 billion in cash, $31.3 billion in long-term debt, 2025 adjusted EPS guidance of $10.75-$10.95, and that reliable $1.24 quarterly dividend.
But forget the current numbers - the real money's in what's coming next.
Here's what the market is missing: JNJ is promising 5-7% compound annual growth between 2025-2030, with ten drugs hitting $5+ billion in annual sales by decade's end.
Sound ambitious? Maybe. But they've got the pipeline to back it up – from immunology stars nipocalimab and icotrokinra to neuroscience contenders seltorexant and aticaprant, plus oncology plays like TAR-200 for bladder cancer.
I've seen this movie before with AbbVie (ABBV), which navigated the loss of $20+ billion Humira without missing a beat.
And JNJ looks even better positioned - their pharma division is targeting $58 billion in 2024 revenues, which would make them the biggest player in Big Pharma, ahead of Pfizer (PFE), AbbVie (ABBV), Roche (RHHBY), AstraZeneca (AZN), Sanofi (SNY) and Novartis (NVS).
The only real wildcard? That pesky talc litigation.
JNJ's latest move – spinning the lawsuits into Red River Talc LLC and filing for bankruptcy – could cap the damage at $8.5 billion. They claim 75% of claimants are on board, with a court ruling expected this month.
So, what's my take? I think JNJ's 2025 will be a "reset" year, especially the first half. But just like buying straw hats in winter, there might be an opportunity here for patient investors. Management says the back half will be stronger, setting up 2026 for what could be a very interesting guidance call.
While the market frets about Stelara's patent cliff, smart money is quietly building positions. That's why I'm maintaining my stand to buy the dip.
After all, sometimes the best trades are the ones that make you a bit uncomfortable at first. And if you're worried about patent cliffs, just ask any AbbVie shareholder how that worked out for them.
