Global Market Comments
November 9, 2023
Fiat Lux
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
Tag Archive for: (AAPL)
We have recently had a large influx of new subscribers.
I have no idea why. Maybe it’s my sterling personality and rapier-like wit.
For whatever reason, I think it's time for all to undergo a refresher course on how to most efficiently go long the market with the best possible risk/reward ratio.
I’m talking about buying vertical bull call debit spreads.
Most investors make the mistake of investing in positions with only a 50/50 chance of success, or less. They’d do better with a coin toss.
The most experienced hedge fund traders find positions that have a 99% chance of success and then leverage up on those trades. Stop out of the losers quickly and you have an approach that will make you well into double digits, year in and year out, whether markets go up, down, or sideways.
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 in price over a defined limited period.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced for most of the last several years, and will almost certainly see again.
I have strapped on quite a few of these babies across many asset classes this year, and they are a major reason why I am up so much this year.
To understand this trade I will use the example of the Apple trade, which most people own and know well.
On October 8, 2018, I sent out a Trade Alert by text messages and email that said the following:
BUY the Apple (AAPL) November 2018 $180-$190 in-the-money vertical BULL CALL spread at $8.80 or best
At the time, Apple shares were trading at $216.17. To accomplish this, they had to execute the following trades:
Buy 11 November 2018 (AAPL) $180 calls at….……..…$38.00
Sell short 11 November 2018 (AAPL) $190 calls at…...$29.20
Net Cost:…………………….………..…...............……….….....$8.80
A screenshot of my own trading platform is below:
This gets traders into the position at $8.80, which costs them $9,680 ($8.80 per option X 100 shares per option X 11 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 (November 16, 2018), and only different strike prices ($180 and $190).
The maximum potential profit can be calculated as follows:
+$190.00 Upper strike price
-$180.00 Lower strike price
+$10.00 Maximum Potential Profit
Another way of explaining this is that the call spread you bought for $8.80 is worth $10.00 at expiration on November 16, giving you a total return of 13.63% in 27 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,680 you put up.
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 vertical bull call spread so much.
As long as Apple traded at or above $190 on the November 16 expiration date, you will make a profit on this trade.
As it turns out, my take on Apple shares proved dead-on, and the shares rose to $222.22, or a healthy $32 above my upper strike.
The total profit on the trade came to:
($10.00 expiration - $8.80 cost) = $1.20
($1.20 profit X 100 shares per contract X 11 contracts) = $1,320.
To summarize all of this, you buy low and sell high. Everyone talks about it but very few actually do it.
Occasionally, Vertical Bull Call Spreads don’t work and the 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. In those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
I start looking at a stop loss when the deficit hits 10% of the size of the position or 1% of the total capital in my trading account.
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 online platform, please click here.
Good luck and good trading.
Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market
Mad Hedge Technology Letter
November 6, 2023
Fiat Lux
Featured Trade:
(HIGHER FOR LONGER IS NOT OFF THE TABLE)
(BIG TECH), (QQQ), (AAPL), (GOOGL), (META), (TSLA)
Tech (QQQ) earnings turned out to produce some positive performances.
Dominant companies can produce dominant earnings even in troubled times.
So what is the problem?
The sales outlook underwhelmed as the American consumer and business keep getting stretched to the limit.
I believe that traders shouldn’t expect a quick turnaround of sales projections for 2024 unless there are some material structural improvements in the business and consumer environment.
No savior is coming for 2024.
All signs point to more uncertainty and not less and rightly so as high inflation has only been replaced by a decrease in the rate of inflation.
Things are still expensive and that means less opportunity for tech to build a growth story.
Apple, Alphabet, Meta, and Tesla all gave investors reason to rub smiles off faces.
From Apple’s unimpressive holiday outlook to Alphabet’s tepid cloud computing sales results, a recurring theme for the group was weakness.
Meta warned that the year ahead is looking less predictable, while Tesla raised concerns that demand for electric cars is starting to weaken.
Despite Tesla's missing earnings, the group is poised to surpass the 36% increase estimates called for before earnings season began.
The tech sector in the S&P 500 still carries a nearly 36% premium to the index on a forward price-to-earnings basis, per data compiled by Bloomberg Intelligence.
There’s a lot of AI hype, but not every company is market-ready.
Everything can change in a heartbeat if there is economic or geopolitical upheaval, which would directly impact stocks.
The market is still pricing in no spreading of military activity as it looks through it as a self-contained area.
Therefore, the pendulum has swung the completely opposite direction as the U.S. 10-year treasury yield has dropped from 5% to 4.6%.
The strength in treasuries could be short-lived, because several have told me that traders are jumping back into the short-term trade which would signal higher for longer.
The Fed Futures show that the first 25 basis rate is forecasted for May 2024 with 2 more consecutive .25% rate cuts following the first.
The American consumer just might have enough juice for one more splurge that would then push back rate cuts from May to somewhere closer to July or August.
Therefore, it’s easy for me to see how this 6.5% surge has a little longer follow through only to soon clash with a “higher for longer” narrative.
The true tailwind for tech stocks here is that much of the bad news has been priced in and any violent surge in treasury yields seems like a low probability for the last 7 weeks of the year, unless another global conflict breaks out.
Seasonal buying could mean that November is more positive than negative for tech stocks and any big draw down should be bought in a quality tech name. December could be a harder slog for tech.
Mad Hedge Technology Letter
October 25, 2023
Fiat Lux
Featured Trade:
(AMERICA SHINES WHILE EUROPE SLUMBERS)
(TSLA), (NVDA), (AAPL), (ABNB), (UBER)
Europe’s fintech companies are exploding.
The weakness in stock prices is emblematic of the broader malaise in the Eurozone economy.
The positive here is that the US economy keeps chugging along and on a relative basis, is leaps and bounds stronger than its counterpart.
Why does that matter?
The less money invested into European tech can be diverted into the likes of Tesla (TSLA), Nvidia (NVDA), Apple (APPL), and the rest of the American tech companies.
I absolutely see this as a zero sum game in a world where all the low-hanging fruit has been plucked.
In a globalized world, investors can really just dabble in whatever national market they seek to profit from with ease.
It’s really just a few taps of the screen.
Silicon Valley is already heavily entrenched in Europe with sprawling workforces in many of the 27 countries in which they arbitrage lower wages to their benefit.
If one ever hoped a local rival would root out American variants, it’s a hard slog ahead.
France’s worldline shares plummeted a record 59%, erasing €3.8 billion ($4 billion) of market value, after the French payments company slashed future forecasts.
The stock’s plunge echoes August’s huge fall in peer Adyen NV and follows Tuesday’s 72% drop in fintech CAB Payments Plc. Shares in Adyen declined 7.5% on Wednesday, while another peer, Nexi SpA, slid 18%.
Since then, worries over lofty valuations and a broader slowdown in consumer spending have brought the high-flying stocks back to earth. Adyen, Nexi, and Worldline have lost more than $33 billion in market value combined in the year to date.
Worldline said it now sees full-year organic revenue growth of 6% to 7%, down from a previous forecast of 8% to 10%. The company’s third-quarter sales also missed estimates.
Small fintech companies growing in the single digits is one of the biggest fopaux an up-and-coming fintech company can commit.
Management also complained that European consumers are tapped out.
They don’t have the money to allocate to “non-discretionary” items.
Europeans are basically paying for shelter, energy, and food.
If there is anything else left over, it’s not much. That’s what happens when the cost of living rises between two and three times.
Management also emphasized an acute slowdown in German consumer spending which hurts since these consumers are some of Europe fintechs biggest customers.
I do believe that many investors aren’t going to stay invested in Europe’s fintech space and it is ripe for consolidation which ironically could come from America’s magnificent 7 who have the deep pockets.
It’s a fragmented sub-sector of tech with some operators pigeonholed into one microscopic area of Europe like Andorra or Slovenia.
Technology scales but Europe is hard in the sense it must cut through a vast language, sprawling bureaucracy, high tax regimes, and cultural barriers not to mention different laws. Throw into the mix that multinationals have stopped supporting work visas for non-EU citizens and it is easy to understand why Europe is not ideal for starting tech firms.
The narrow path is why a company like Worldline generates revenue of around $1.2 billion per quarter as opposed to an American PayPal (PYPL) which does $8 billion per quarter.
If we look at the big boys like Google, quarterly revenue goes up to $80 billion per quarter highlighting how far back Europe is from the real upper echelon of American tech.
If Europe is getting trounced by the likes of PayPal, then investors can’t get angry when they get labeled the bush leagues of global technology.
Look at Silicon Valley and especially the tier 2 firms like Uber (UBER) or AirBnb (ABNB) for the real growth instead of Europe’s suffocation of free market technology.
Mad Hedge Technology Letter
October 20, 2023
Fiat Lux
Featured Trade:
(INDIA CATCHES A TECH WAVE)
(GOOGL), (AAPL)
With all the tumult going on in the world today, it’s not shocking that big decisions are being made in terms of tech production and manufacturing outsourcing.
These decisions will reverberate through the tech world for a generation.
China used to be the factory of the world and many thought that its economy would rebound from its lockdown lull to carry the tech world on its shoulders.
It’s clear that China will remain in the doldrums.
China and the west are decoupling fast and that means American tech companies are no longer comfortable doing business in the Middle Kingdom.
Many big players like Apple are hitching a ride out of the land of pot stickers and Beijing roast duck.
The latest announcement was Alphabet (GOOGL) who will begin production in India of its Pixel 8 smartphones in time for sales in 2024.
Google will partner with local and global suppliers to put together its first India-made handsets, hardware.
The move from the company responsible for Android, the world’s most-used mobile operating system, adds to a string of successes by India’s government in enticing international device makers to build locally.
Dixon Technologies India and Foxconn Technology Group’s Indian unit are the leading contenders to manufacture the phone.
Indian Prime Minister Narendra Modi’s administration has attracted greater investment from Apple, which opened its first two stores in India this year and is increasingly shifting iPhone production from China to India.
The latest iPhone 15 generation was also the first in the company’s history to launch made-in-India handsets at the same time as those made in China.
Outside of US device makers, Samsung Electronics Co. also manufactures its Galaxy handsets in India and Chinese Android vendors have set up partnerships with local assemblers.
Google counts India as a critical growth engine, where most smartphones run on its Android ecosystem.
However, Google also faces business and regulatory challenges there – startups and companies like Disney have legally challenged some of its in-app policies. Google is also fighting several antitrust battles including one related to alleged abuse of its position in the Android market.
Interestingly, the South Asia country's approach to attracting big manufacturing investments isn't limited to incentives alone.
The government has also implemented comprehensive restrictions to control the influx of foreign electronic devices. It's a strategic blend of both persuasion and coercion, convincing these tech giants to take the plunge into the Indian manufacturing landscape.
Around 200 U.S. companies are actively exploring the possibility of shifting their manufacturing bases from China to India, according to the US-India Strategic and Partnership Forum (USISPF).
It is entirely realistic that in the short future that India will secure the title of the world's largest global manufacturing hub, toppling China's longstanding dominance in the years to come.
These developments are emblematic of a tech manufacturing world in turmoil.
India is perceived as a safe bet to be able to pump out all those gizmos and gadgets that American big tech is reliant on to drive sales.
India also has a massive work force that specializes in software.
It’s easy to say that if American big and small tech hopes to power itself for the next 30 years; they absolutely need the mojo of Indian tech labor and manufacturing to prop up Silicon Valley.
Google moving their supply chain to India gives me more conviction in recommending this stock for the long term.
Global Market Comments
October 19, 2023
Fiat Lux
Featured Trade:
(WHO WAS THE GREATEST WEALTH CREATOR IN HISTORY?)
(FB), (AAPL), (GOOG), (AMZON),
(XOM), (BRKY), (T), (GM), (VZ), (CCA),
(WHY DOCTORS MAKE TERRIBLE TRADERS?)
Who’s been buttering your bread more than any other?
Which publicly listed company has created the most wealth in history?
I’ll give you some hints.
The founder never took a bath, was a devout vegetarian, and dropped out of college after the first semester. The only class he finished was for calligraphy. And he was a first-class asshole.
Silicon Valley residents will immediately recognize this character as Steve Jobs, the co-founder of Apple (AAPL).
In 43 years, his firm created over $3 trillion of wealth for his shareholders, making it the largest in the world.
Until a decade ago, Exxon (XOM) held the top spot, creating $900 million in new wealth, although to be fair, it took 100 years to do it.
To be completely and historically accurate, most of the original seven sister oil companies are decedents of John D. Rockefeller’s Standard Oil Company.
Add the present value of these together, and Rockefeller is far and away the biggest money maker of all time. And he made most of this before income taxes were invented in 1913!
Reviewing the performance of other top-performing companies, it is truly amazing how much wealth was created from a technology boom that started in the 1980s.
Investors’ laser-like focus on the Magnificent Seven is well justified.
That’s why I often tell guests during my lectures around the world that if they really want to be lazy, just buy the ProShares Ultra Technology ETF (ROM) and forget everything else.
Another college dropout’s efforts, those of Bill Gates Microsoft (MSFT), produced an annualized return of 25% since 1986. That made him the third greatest wealth creator in history.
It also made him the world's richest man, until Jeff Bezos and Elon Musk came along. Gates is thought to have single-handedly created an additional 1,000 millionaires as so many employees were aided in stock options.
Facebook (FB) is the youngest on the list of top money makers, creating an annualized 34.5% return since it went public in 2012.
Alphabet (GOOG) is the second newest on the list, racking up a 24.9% annualized return since 2004.
Amazon (AMZN) is 14th on the list of all-time wealth creators and has just entered its 20th year as a public company.
Being an armchair business and financial historian, many runners-up were major companies in my day, but generate snores among Millennials now.
Believe it or not, General Motors (GM) still ranks as the 8th greatest wealth creator of all time, even though it went bankrupt in 2008.
Ma Bell or AT&T (T) ranks number 17th but was merged out of existence in 2005. A regrouping of Bell System spinoffs possesses the (T) ticker symbol today.
Among its distant relatives are Comcast (CCV) and Verizon Communications (VZ).
Warren Buffet’s Berkshire Hathaway (BRKY) ranks 12th as an income generator, with an annualized return of only 11.94%.
Its performance is diluted by the low returns afforded by the textile business before Buffet took it over in 1962. Buffet’s returns since then have been double that.
Analyzing the vast expanse of data over the last 100 years proves that single stock picking is a mug's game.
Since 1926, only 4% of publically traded stocks made ALL of the wealth generated by the stock market.
The other 96% either made no money to speak of, or went out of business.
This is why the Mad Hedge Fund Trader focuses on only 10%-20% of the market at any given time, the money-making part.
In other words, you have a one in 25 chance of picking a winner.
A modest 30 companies accounted for 30% of this wealth, while 50 stocks accounted for 40%.
You can only conclude that stocks make terrible investments, not even coming close to beating the minimal returns of one-month Treasury bills, a cash equivalent.
It also is a strong argument in favor of indexed investment in that through investing in all major companies, you are guaranteed to grab the outsized winners.
That is unless you follow the Diary of a Mad Hedge Fund Trader, which picked Amazon, Apple, Facebook, Google, NVIDIA, and Tesla right out of the gate.
If you want to learn more about the number crunching behind this piece, please visit the research of Hendrik Bessembinder at the W.P. Carey School of Business at Arizona State University.
Such a Money Maker!