Options Trading Newsletter - Issue #162 - Guess What's Shrinking? [Options Today - LONG PROTECTION/HEDGING & Position Updates]
Guess What's Shrinking?
Guess What’s Shrinking?
Lately, I've noticed something alarming at McDonald's—the beloved Strawberry Sundae seems to have shrunk by at least 25%. Once upon a time, the ice cream towered above the cup's rim, and the strawberry topping spilled over in abundance. Nowadays, the entire sundae barely fills three-fourths of the cup.
Initially, I attributed this to stinginess on the part of the store attendants, perhaps cutting corners to save on costs. However, after visiting three different locations and finding the same diminished size, suspicions arose. Could it be that instructions for clandestine cost-cutting measures have been disseminated across franchises?
In the past few months, McDonald's, like many other businesses, faced boycotts due to the Israel-Gaza conflict, resulting in a significant dent in profits. Historically, smaller food traders resorted to reducing portion sizes to maintain prices and bolster profitability during tough times. Now, it seems even corporate giants are adopting similar strategies, from substituting cheaper ingredients to downsizing servings of non-weighted products like ice cream sundaes, cones, and fries.
As inflation rears its head, our wallets grow shallower, and our stomachs less satisfied. Some may find themselves compelled to swap out staple foods for more economical alternatives or opt for smaller, less frequent meals. This trend appears to be gaining momentum each passing year, unless we reimagine how we earn income. After all, does anyone ever receive a sudden 50% salary increase? It's doubtful but more common to see a bottle of coke rise by 50% in price. So, how do we keep up?
Predictably, some individuals tighten their belts, both figuratively and literally, cutting back on expenses and consumption. Others resort to working longer hours or taking on additional jobs. Yet, there's a harsh reality—we all have the same 24 hours in a day, assuming we forego sleep. Trading hours for money may offer temporary relief, but it's hardly a sustainable solution. The key lies in cultivating passive income streams, a concept that warrants deeper exploration beyond the scope of this article.
In the face of shrinking opportunities and diminishing returns, it's incumbent upon us to take action. It's one thing if we must endure smaller portions, but why should our children suffer a diminished quality of life? The responsibility falls squarely on our shoulders to provide, and we must rise to the occasion.
"Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy." - Dale Carnegie
SPX (4967)
Reality strikes? Largest down week so far with over 3% shaved off from SPX. With earnings season starting to heat up, market is starting to realise that what goes up will eventually have to come down. TSMC beat earnings but did not give a good outlook, ASML posted worst than expected results and SMCI kept silent on its preliminary estimates unlike past quarters where they gave guidance pre results. Add 3 together and NVDA dropped over 13.6% for the week, 10% was just on Friday. That itself gave up on the rar rar euphoria on the overall market and SPX 156 points for the week.
Earnings season continues this week with 4 out of the 7 magnificent 7 making its earnings. It’s make or break this week. Results for last quarters doesn’t really matter but more on its outlook, just like TSMC a beat with a negative/depressed outlook will tank the stock.
SPX broken down daily 50 MA without any fight last week and is likely to see it break the support of the daily 21 weekly MA. We see it to probably hit 4819 support from last year high. Current retracement is slightly above 5% from the 22% rally since October 23. Further reality is higher for longer interest rate which was further affirmed last week by J.Powell giving him no economic indicators to have a basis for an immediate rate cut. This week, he will also get additional data for their rate consideration being PMI, GDP, Unemployment and Claims and Core PCE.
Trading range for the week is 4800 to 5100. Note that the weekly downside range has doubled the upside.
NDX (17037)
The bigger they are the harder they fall. I’m not an expert on physics but my kids are talking about velocity and I believe weight adds on to the velocity of matter falling. The bigger the mass the bigger the crater formed I believe. So far NDX have given up 8% of its 24% runup since October, about a third. From the huge red weekly candle, I don’t think the previous year high of 16764 will hold and NDX could easily drop down to 16000, the 50 daily MA level. That will be in between the 50% and 61.8% retracement Fibonacci.
Last weeks, had been somewhat good weeks for quick short on some of the high flyers which have reached 52 week high. We did highlight in our #159 Issue the topping resistance of some of these stocks. We were short term taking Bear Put Spreads on some of these as we get to define the risk and give a bit of time for the profits to come in case we get the timing wrong.
Example the one we put in on Thursday on SMH, it is close to 100% profits in 2 days, we will likely take it off this week for a quick profit. SMH is the semiconductor ETF and had quite a bad week with all the semiconductors dropping like flies, NVDA leading the pack with 13% drop. SMH has 20% holdings on NVDA, 12% on TSMC and 5% on ASML.
Keep a watch on earnings which will define where NDX will be going in the next weeks.
Last week we also see the rotation into defensives and utilities. Our position in Campbell Soup (CPB) packed 4.5% jump last week while tech took a dump.
Trading range for the week is between 16200 to 17800.
HANG SENG INDEX (16224)
HSI was a bit choppy last week with both reaching +200 points and -200 over points on same week. We took off some long position when it hit above 16500. HSI hit lows of around 16100 level and finding strong support. As the dip was also quite strong and fast on Friday, we did not add further position as we already had a big enough size in the earlier week, taking on losses.
There could be possibility of market rotation this week as the US takes a breather. The positive GDP data out from China could give somewhat some justifications for fund managers to move their money out profit taking in the US and going into undervalued markets such as China/Hong Kong.
OPTIONS TODAY - LONG PROTECTION/HEDGE ON PORTFOLIO
The market is bound for a retracement and it’s time you think of some protection on your long stock portfolio. Here are the possible actions:-
Easiest, sell and move into treasury and get peace of mind at 5%+
Get protection through option structures:-
Sell a covered call close to ATM if you have 100 shares at least. 1 option contract protects 100 shares. If you do not mind losing the shares at current value but somehow don’t want to immediately sell, then sell an ITM covered call. You should get 100% of the intrinsic value for strikes below share price while also earning extrinsic value from the time value. If stock price does not go down below strike price on maturity, your position would be as good as having sold the shares at the point of getting into the short call. Hence, you still realise the stock as if you sold the stock at day one.
Buy an ATM put. But this could cost you 10-15% of the strike price but your stock loss will be partially covered by the profit on the long put. You could do a hybrid and finance the put by selling an ATM short call. If price does not go down, you will realise the stock at the strike price of the short call as it will get ITM on expiry. If price goes down, your long stock will be protected by the gains from the long put and also premium earned from the short call.
Buy a put on SPY if you have various stock and not enough 100 stock per share to enter into a direct stock to option protection. Use SPY as a market proxy to protect losses on individual stock. But please bear in mind that it is not a 1:1 protection as correlation of stock to SPY is not 1:1. Hence, you can only partially protect the positions using SPY or you use your stock portfolio value to determine how much SPY put contracts to buy.
Buy an Inverse ETF or its options. It can be 2x or 3x the movement of DOW/NDX/SPX. We covered these in one of our past Traders Talk. The archive is on facebook/youtube.
ProShares UltraShort Dow30 (NYSE: DXD), which is pegged to the Dow Jones Industrial Average,
ProShares UltraShort QQQ (NYSE: QID), which tracks the Nasdaq index
ProShares UltraShort S&P500 (NYSE: SDS), which is paired with the S&P 500.
I have covered some of these protection methods in past issues. Go check them out and also in our tiktok channel and facebook/youtube past Traders Talk.
There’s nothing sentimental in stockholding, if it is time to sell just sell. Even if you are a avid fan of Tesla, there’s no point of being confident that one day it will top $1000, while waiting for that look at price action to realise profit and enjoy your Tesla drive while waiting to go back in. All insiders are selling while price is good, there is no shame in taking profits!
OPTIONS TODAY - WATCHLIST SYNTHETIC LONG ON BIDU
Following on our last week Options Today watchlist, we gave a heads up early entry indication on BIDU last week on Notes.
The last d days although closed below $96 the candles are green showing support even at levels below $96. Prices opened lower but closed higher even with the US markets in red. We also see strong support on HSI last Friday when it dipped down to 16100 level, a bullish sign for the market. HSI opened strongly on Monday today. We had already entered into the position earlier but taking losses. These should reverse when price action changes. The momentum indicator has already reversed colour indicating a potential change of price action upwards.
OPTIONS TODAY - UPDATE ON LONG JAPANESE YEN FUTURES
There is no change in the position, and Yen futures is still tanking everyday although in a slower pace. The BOJ governor did not speculate the possibility of intervention and this coming Friday is the CPI and BOJ monetary policy statement. Perhaps a more positive statement on further hikes by BOJ will send the bears scrambling and return our position to positive territory. We will most likely take off our short calls/spreads before Friday to take profits off the table as the values have already deep in profits. All the bull put spreads are ITM but because of the position has past 30 days, when it goes back OTM, the profits should come in faster. Let’s see how it plays out as we still have time till Mau/early June for it to turnaround.
OPTIONS TODAY - TRADE UPDATE IRON CONDOR ON MICRO CRUDE OIL FUTURES - JUNE24
War or no war? As it seems, the speculation did not hold long as oil took a dive last 3 weeks. Last week, we see crude oil futures for June holding above $81. Our position is still around the same levels but somewhat protected as oil is not shooting off the roof neither is it going to dip below $80 as the middle east tension is still lingering. Good if it bounces around in between $92 and $77.
OPTIONS TODAY - TRADE STATUS ON BA RATIO SPREAD
For days, BA has been strong on opening but gave up the profits by close, possibly from the overall weak US markets. We have closed off the $185 long put and the $180 short put was assigned. We sold the assigned shares and sold 2 short put at $11.25 expiring 26 April. The trade is in a loss of about $441.
BA is announcing earnings on Wednesday before market open. As we are doing a short put, the risk is undefined. BA is already trading at 52 weeks low due to the issues it is continuously bogged with. We will continue to monitor the trade as we are now having 200 delta exposure on the trade by virtue of the deep ITM position. We only need the price to move up slightly around $2+ to go back in breakeven position.
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.