Global Market Comments
November 21, 2024
Fiat Lux
Featured Trade:
(THURSDAY, JANUARY 16, 2025 SARASOTA FLORIDA STRATEGY LUNCHEON)
(TEN REASONS WHY I ONLY EXECUTE VERTICAL CALL DEBIT SPREADS)
(AAPL), ($VIX), (SPY)
Tag Archive for: (AAPL)
At today’s Mad Hedge Biweekly Strategy Webinar, I received an excellent question: Why is the Vertical Call Debit Spread my favorite trading vehicle?
So let me ask you this: How would you like to play blackjack now that the dealer would bust 90% of the time? What if you played roulette with the assurance that the ball would land on black 90% of the time?
I bet you would be interested….very interested.
I only trade with Vertical Call Debit Spreads in my own personal account. While your broker may be recommend outright options trades to you because that’s where the volume and the commissions are, if he is smart enough, he is almost certainly executing Vertical Call Debit Spreads for his own account.
And let me tell you why.
1) A Vertical Call Debit Spread offers the most favorable risk/reward ratio of any financial instrument among the plethora out there.
2) A Vertical Call Debit Spread allows you to precisely define your risk. You can’t lose any more money that you put up. With naked short puts, for example, which most other newsletters often recommend all day long, your potential losses are unlimited
3) Vertical Call Debit Spreads allow a vast increase in profits compared to outright stocks, potentially 10X-100X. You can get a claim on $1 million worth of stock for literally only $10,000, not bad when you know the direction. Customers of mine who are nailing 1,000%-2,000% returns in a year, and I get a few every year, are executing very deep out-of-the-money Vertical Call Debit Spread LEAPS.
4) The liquidity for Vertical Call Debit Spreads is enormous for the most popular stocks, like Nvidia (NVDA) and Tesla (TSLA), with exercise values of the options more than the underlying stocks.
5) Vertical Call Debit Spreads allow you to specifically target a share price trading range (very deep in-the-money) that has the highest probability of taking place.
6) The day-to-day volatility of Vertical Call Debit Spread is very low, usually 8% or 9%. That’s because you are long on one option and short on another. This prevents traders from selling bottoms and buying tops, always fatal mistakes. When people ask me what I do for a living, I tell them I stop people from selling market bottoms and buying market tops.
7) When you have a seasoned war horse like me with 55 years of trading experience making your stock picks, Vertical Call Debit Spreads become a total no-brainer. This is why my Trade Alert service is up 68% this year, almost triple the S&P 500 (SPY).
8) Vertical Call Debit Spreads hit their maximum profit whether markets go up, sideways, or down small. It’s only the surprise out of the blue, down moves are large, triggered by black swans, that lose us money and those we stop out of immediately.
9) A Vertical Call Debit Spread benefits enormously from time decay. That is how they hit maximum profits when the underlying stock is unchanged. It gives you a cushion against mistakes and bad stock calls. That’s why I focus on the front-month expirations where time decay is accelerated.
10) Vertical Call Debit Spreads have a built-in short volatility element. If you buy a Vertical Call Debit Spread with a Volatility Index at $24, and it then drops to $14, you make a lot of money. Over the years, I have found that it is almost impossible to lose money with Vertical Call Debit Spreads when the Volatility Index is over $30.
11) OK, I thought of one more reason. Vertical Call Debit Spreads are much cheaper than outright options. That’s because you are buying one option and then receive the proceeds from selling short another option, which cuts the price by two-thirds. That lets you triple your size compared to an outright option. Triple the size, and you triple the profits.
Given all this, I think it’s time for all of you to undergo a refresher course on how to most efficiently play the market with Vertical Call Debit Spreads.
Most investors make the mistake of investing in positions that have 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 90% 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 small in price over a limited period of time.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced in 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, and they are a major reason why I am up so much this year.
To understand this trade, I will use the example of 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 debit 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, or a “spread”).
“Bull” (as opposed to “Bear”) means you receive the maximum profit in a rising market as opposed to a falling one.
“Debit” refers to the fact that you have to pay money to obtain this position rather than receive a credit.
The maximum potential profit can be calculated as follows:
+$190.00 Upper strike price
-$180.00 Lower strike price
+$10.00 Maximum Potential Profit at expiration
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 spreads 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 debit 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. On those rare cases when that happens (about 10% of the time), 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 hit 10% of the size of the position or 1% of the total capital in my trading account. It’s easier to dig yourself out of a small hole than a big one.
And why do I execute Vertical Call Debit Spreads rather than Vertical Call Debit Spreads like most professionals do? Because Vertical Call Debit Spreads are easier for beginners to understand.
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.
Good luck and good trading.
Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market
One of the reasons I believe this AI narrative will continue in the short-term is because cash cow tech firms like Meta (META) are pouring cash into AI infrastructure.
There is a lot we still don’t know about the direction of AI – the future is uncertain.
However, the one takeaway is that the AI infrastructure spend continues right now unabated, and we know that because Meta raised capital expenditures guidance for the 2024 fiscal year to between $38 billion and $40 billion, up from $37 billion to $40 billion previously.
They also expect capital expenditures to continue to grow significantly in 2025 due to an acceleration in infrastructure expenses.
Founder Mark Zuckerberg is desperate to not miss out on the “next big thing.” Remember, he whiffed big time at the smartphone, and he will never stop blaming himself for it. Apple has been a constant pain in the ass for his company because Meta still needs to go through Apple management and their app store to get their platform to users. They also changed the privacy settings, which were directly targeted at Meta.
Zuckerberg is also on record for saying that Meta would be twice as profitable if he could remove the costs of going through Apple.
Meta is still growing at 19% year over year, and that is quite impressive for a company this big.
The company reported 3.29 billion daily active people for the third quarter. That was up 5% year over year, and we can expect that percentage point to stick in the single digits.
Zuckerberg has been pointing to the company’s massive investments in artificial intelligence, which includes spending billions of dollars on Nvidia’s popular graphics processing units, as helping improve the company’s core online ad business in the aftermath of Apple’s 2021 iOS privacy update. The company has been improving upon and building more data centers to help provide the technology infrastructure needed for its AI strategy.
The company’s Reality Labs hardware unit posted an operating loss of $4.4 billion in the third quarter, which was less than analysts’ expectations of $4.68 billion.
Facebook Reality Labs is a research and business unit of Meta Platform that develops virtual reality (VR) and augmented reality (AR) products and technologies.
I do believe the jury is still out on the Facebook Google story. It is not a given that consumers will just adopt some ridiculously looking VR headset and venture off into daily life with that thing on. The over $4 billion of losses points to a challenging time to turn the VR business into something legitimate.
Apple has also had some issues with its VR headset as well.
In the short term, Meta is still highly profitable, and they roll these profits into trying out new businesses.
It only takes one new killer business for the stock to explode again, much like what happened when Zuckerberg doubled down in social media through the acquisition of Instagram.
Investors need to be patient and keep a hold of META stock as it grinds higher.
In the event the stock does experience a mild sell-off, I am certain dip buyers will come to the rescue because of the nature of the stock being high quality.
Although digital ads aren’t the growth engine it once was, they are giving time and money for META to find the next path forward. 99% of tech companies don’t have that luxury.
Mad Hedge Technology Letter
November 4, 2024
Fiat Lux
Featured Trade:
(A SIDEWAY CORRECTION BEFORE THE MOVE UP)
(AAPL), (BRK-B)
Warren Buffett shedding millions of Apple (AAPL) stock, and the stock to subsequently avoid a meaningful dip is an inherent victory for Apple and big tech.
In almost any other stock, the price action would be sharp and damaging to the underlying stock, and Apple had a wave of buyers to pick up all the shares Buffett unloaded.
Buffett and his flagship investment company, Berkshire Hathaway (BRK-B), did really well in their Apple investment, where they loaded the boat with Apple stock.
Taking profits is never a bad thing, but I do believe Buffett had a feeling that Apple started getting too ahead of itself.
The company still has not done enough since creating the iPhone, and Buffett certainly was not impressed by the latest “upgrade” to the flagship device.
Apple shares are flat over the past 4 months after a sharp 22% rise in the summer starting from May.
I believe that the sideways price corrections will start to drag out even longer for many big tech companies as their growth engines start to fizzle out.
AI is also due another sideways correction after gangbuster returns.
It is becoming quite evident that “corrections” in big tech aren’t that damaging, and as long as investors can ride out the sideways move, the next move after that is usually to the upper right-hand corner.
Buffett has sent over 515 million shares of Apple to the chopping block since October 2023
Amid Warren Buffett's selling spree, top-holding Apple has been meaningfully reduced. In a three-quarter period from Oct. 1, 2023 through June 30, 2024, Berkshire's stake in Apple declined by more than 515 million shares, or 56%, to precisely 400 million shares.
During Berkshire Hathaway's annual shareholder meeting in early May, he opined that the corporate tax rate would likely climb in the future. With his company sitting on a mammoth unrealized gain in Apple, he suggested that locking in some gains now at a lower tax rate would, eventually, be viewed favorably by Berkshire Hathaway's shareholders.
Apple has done well to engineer the stock higher with its heavy involvement in shareholder returns, particularly buybacks.
Since initiating share repurchases in 2013, Apple has bought back $700.6 billion worth of its common stock and reduced its outstanding share count by 42.2%. This has had a decisively positive impact on the company's earnings per share (EPS).
Sales of its physical devices, including iPhone, iPad, and Mac, have been weak for much of the last two years. If a growth company's sales stall, it can expose its valuation premium.
The Oracle of Omaha's broad-based selling also alludes to the lack of value on Wall Street. This is one of the priciest stock markets in history, and Berkshire's record cash pile of $276.9 billion plainly suggests that Buffett and his team are struggling to find attractive deals.
Big tech is increasingly finding it hard to move the needle.
Anti-trust has also been a thorn in their sides lately as the Fed close it on them from a litigious angle.
In the short term, even without its next growth engine, I do believe Apple and certain big tech companies have the opportunity to experience a winter rally into yearend.
First, we need to get through the election, but the US economy is still running hot at 3%, and tech will do like it usually does, harvest the majority of the gains from the overall economic expansion in the United States.
Mad Hedge Technology Letter
November 1, 2024
Fiat Lux
Featured Trade:
(WILL THE TRIFOLD PHONE SAVE TECH?)
(HUAWEI), (AAPL)
Silicon Valley is usually on top of the innovation game, and as Huawei announced the launching of its trifold smartphone, one must ask whether Silicon Valley is late to the party or if this technology is even worth their time.
My guess is that foldable devices won’t move the needle, and these announcements aren’t really about moving revenue but to offer bluster in a global game of cat and mouse.
In general, the smartphone super cycle is about tapped out, and I don’t see a foldable phone as a reason for another re-acceleration of revenue.
There is a higher chance that in the next few years, this foldable technology is adapted for some other technology and written off on the balance sheet.
To think it could be some revolutionary new trend is beggars’ belief.
To be honest, many consumers are tired of screen time and can’t get off their screen because work duties connect them to the screen.
When needing a bigger screen to watch global sporting events, many would prefer a large-screen TV that doesn’t fold. This phone has no TV screen – not by a long shot.
It is a little difficult for me to understand the use case here for Huawei going big in the foldable screen business.
It’s not like the new phone will be cheap either, the new trifold smartphone will start at around $2,800, which is more expensive than most premium laptops.
Huawei announced its foldable product on the same day as Apple unveiling the new iPhone.
Apple announced its iPhone 16 Pro Max will start at $1,199 and the iPhone 16 at $799.
The first set of Apple Intelligence AI features will be available in a free software update next month.
Huawei’s Mate XT also comes with artificial intelligence features, such as text translation and cloud-based content generation.
The device is 3.6 millimeters thick when unfolded, with a 10.2-inch screen.
More than 3.5 million people had pre-ordered Huawei’s trifold Mate XT smartphone as of midday Tuesday.
The Chinese company has sought to make a comeback in the smartphone industry, which was hard hit after the U.S. slapped sanctions on the company in 2019. The U.S. in October 2022 imposed broader restrictions on American sales of advanced chips to Chinese businesses.
Apple fell out of the list of top five smartphone vendors in China in the second quarter of this year. It was the first time that domestic players held all five spots.
Clearly, Chinese tech views Apple as the top dog to compete against, but I would say that Apple’s star is waning in China.
They are being pushed out by the Chinese government, who are indirectly suggesting to Chinese consumers to go with domestic alternatives.
National champions and protecting them are the modus operandi in the age of deglobalization, and that will not change anytime soon.
As for the tech, foldable screens are a mediocre and lateral upgrade.
The size of a screen has a size limit to its usefulness, and building gargantuan screens does not suggest that it could trigger some new wave of untapped profits.
I believe Apple is smart in not aggressively pursuing foldables, and the quest continues to find the new killer tech that will take over.
Until then, tech stocks should grind up, but not in a dramatic fashion.
Mad Hedge Biotech and Healthcare Letter
October 28, 2024
Fiat Lux
Featured Trade:
(WHEN WALL STREET MET PHARMA)
(PFE), (TSLA), (AAPL)
If corporate America were a dinner party (and let's face it, sometimes it absolutely is), Pfizer (PFE) would be that guest who showed up fashionably late with an award-winning bourbon pecan pie during the pandemic, and is now being quietly judged for bringing Trader Joe's crackers to the latest soirée. The pharmaceutical giant, which briefly enjoyed the kind of celebrity usually reserved for Tesla (TSLA) and Apple (AAPL), finds itself in the midst of what we might delicately call a boardroom intervention. With its stock price taking a dive, Pfizer attracted the attention of Starboard Value, a hedge fund with a billion dollars' worth of opinions about how to run things better.
Unfortunately for Starboard, these problems are not that simple to fix. Here's the thing about making breakthrough drugs: 9 out of 10 fail, each costs about $2 billion to develop, and even the most brilliant scientists can't tell you which one will work until the very end. This uncertainty sits at the heart of Pfizer's current predicament. After delivering a ratings blockbuster with its COVID-19 vaccine and Paxlovid treatment, the company now faces the pharmaceutical industry's dreaded sophomore album syndrome.
On top of that, every successful drug faces the same issue: it comes with its own expiration date. Patents run out, generic competitors swoop in, and suddenly everyone's asking, "What's next?"
And here's where it gets more interesting, in the way that all corporate power plays are interesting if you enjoy watching incredibly wealthy people disagree about how to become even wealthier. Take Starboard's critique of Pfizer's performance. It has all the subtlety of a CNN town hall debate, spiced up with the potential involvement of former Pfizer CEO Ian Read and CFO Frank D'Amelio — a plot twist as unsurprising as finding a filibuster in the Senate.
Having previously applied its corporate reconstruction techniques to the restaurant industry (think less Thomas Keller, more Olive Garden optimization), the hedge fund now fancies itself as something of a pharmaceutical expert. This is like suggesting that because someone successfully managed a food truck, that same person is qualified to run a three-Michelin-star restaurant.
Granted, Starboard has an impressive track record in corporate makeovers, much like the HGTV stars of Wall Street. Still, renovating a pharmaceutical company isn't the same as flipping a restaurant chain. There's something uniquely challenging about applying fast-casual dining turnaround principles to the development of life-saving medications. Some processes simply can't be rushed unless you enjoy explaining to the FDA why you thought clinical trials were more of a suggestion than a requirement.
As we try to figure out what's happening with the pharma giant right now, it helps to keep in mind that the key question isn't just whether Pfizer needs a makeover (though that's certainly part of it), but whether Wall Street's "time is money" philosophy can successfully coexist with the "science takes time" reality of drug development. It's the corporate equivalent of trying to teach quantum physics to a day trader - theoretically possible, but likely to result in some interesting misunderstandings along the way.
So, what's the play here? Looking at Pfizer's current stock price of around $28.45 (down 2.47%), the chart looks about as exciting as a waiting room magazine collection.
While the stock hovers below its 50-day moving average and sits near the lower end of its $25.20 - $31.54 yearly range, there are a few bright spots: a healthy 5.91% dividend yield and several promising projects in the pipeline - an RSV vaccine and an obesity treatment that could have customers lining up around the block again.
But here's my recommendation: Keep this one on your watchlist, but hold off on placing your order just yet.
Think of Pfizer as that once-trendy restaurant that's neither closing its doors nor winning any new Michelin stars - it's simply simmering on medium heat while the new chef (courtesy of Starboard) debates menu changes with the original kitchen staff.
Will Starboard's intervention prove to be the corporate equivalent of a breakthrough drug, or more like one of those miracle cures you see advertised at 3 AM?
The answer, like most things in the pharma world, will take time to develop. And in this battle of wits within corporate America, sometimes the hardest pill to swallow is patience - though I suspect Starboard would prefer it in fast-dissolving form.
After all, when Wall Street meets Pharma, it's less about whether the patient needs the medicine and more about timing the market's appetite.
For now, let's keep this one in the "worth watching" category until we see some signs of the stock's vital signs improving.
Mad Hedge Technology Letter
October 28, 2024
Fiat Lux
Featured Trade:
(THE FUTURE OF TECH STOCKS)
(AI), (NVDA), (XLU), (XLE), (AAPL), (GOOGL), (AMZN), (META), (MSFT)