Advantage Point Newsletter - January 16th, 2018
• This Week's Trade Ideas:
Bullish Ideas: Kraft Heinz Co. Inc. > KHC > $78.77 Last. Buy the Feb. 16th 77.5 Calls for $2.65 or less with a close or anticipated close above $77.92 in an up market with expectations for halt in selling followed by continued strength in the major indices.
Bullish Mentions: None at this time.
Bearish Ideas: WARNING: These ideas are counter-trend so treat them accordingly!
They will probably need major market selling to aid the cause and earnings anticipation could become a factor.
OLIN Corp. > OLN > $37.75 Last. Buy the Feb. 2nd 38.5 Puts for $1.95 or less with a close or anticipated close below $37.25 in a down market with expectations for continued weakness in the major indices. Earnings = 1/30/2018.
Weyerhauser Co. > WY > $34.85 Last. Buy the Feb. 2nd 35.5 Puts for $1.10 or less with a close or anticipated close below $34.75 in a down market with expectations for continued weakness in the major indices. Earnings = 2/2/2018.
Bearish Mentions: None at this time.
• Market Overview:
A light calendar will be buffered by more and more earnings releases and chatter about a government shutdown. As always, they will make of the news what they most-prefer. We plan to stick and move with whatever planned reactions are brought our way.
• Below the Radar:
Bank and Roll like an Early MARCH 2000 Nasdaq Player Should Have!
• Options Academy:
At many, many junctures along the way of even 2017 alone, the markets looked overdone, and yet, they continued higher. Had we “stockpiled” 30 Delta Puts and done nothing beyond that, we’d be holding the bag! (So to speak) That’s the real danger with this approach if it is not actively managed with an eye towards theta hedging. We like the idea, it’s just, all things in moderation...even Crash Bets!
Our “Spider Sense” tells us that the Great Melt-Up is too Vertical
The Trade(s):
We strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these idea(s), last week’s and options education.
Bullish Ideas: Kraft Heinz Co. Inc. > KHC > $78.77 Last. Buy the Feb. 16th 77.5 Calls for $2.65 or less with a close or anticipated close above $77.92 in an up market with expectations for halt in selling followed by continued strength in the major indices.
Bullish Mentions: None at this time.
Bearish Ideas: WARNING: These ideas are counter-trend so treat them accordingly!
They will probably need major market selling to aid the cause and earnings anticipation could become a factor.
OLIN Corp. > OLN > $37.75 Last. Buy the Feb. 2nd 38.5 Puts for $1.95 or less with a close or anticipated close below $37.25 in a down market with expectations for continued weakness in the major indices. Earnings = 1/30/2018.
Weyerhauser Co. > WY > $34.85 Last. Buy the Feb. 2nd 35.5 Puts for $1.10 or less with a close or anticipated close below $34.75 in a down market with expectations for continued weakness in the major indices. Earnings = 2/2/2018.
Bearish Mentions: None at this time.
NOTE: For now, we’re keeping the number of names minimized hence no mentions on either side. Many prior mentions may be of value should the markets actually roll over. It’s too early to tell as we see it, but if things sort out we will add symbols we’ve held off on for now.
Outlook:
Things became double secret over-extended with this morning’s action. The probability of this type of vertical ascent continuing at this pace, even over the short-run, is low from our experience. Anything is possible, and the news will be “good” and spun that way even if it is not. We’re simply thinking that a breather is necessary.
Technicals:
Will be discussed in-depth in the Advantage Point Morning Call webinar.
Fundamentals:
These trade idea(s) and mentions are technically-driven.
(Editor's note: This trade idea may be updated periodically, in keeping with market conditions. It is intended solely for educational purposes.)
Recap of Last Week:
This will be short and sweet. MRK was our lone idea last week for a variety of reasons. However, thanks to the melt-up marching on and with aid from news, it ran up very strongly and closed the gap we targeted in our webinar:
We updated by mentioning rolling as a consideration as well.
Other recent names have all generally moved higher save for SYMC. We noted last week that it may be time to move on from it as it was just about at our trigger area. If there are any questions on it or other recent names, WLL etc. please raise them at this week’s webinar.
Last week we concluded this section with: 😉
Well, actually, this:
Record after record continues to be made in nearly all major indices and in the FAANG mini-basket. The gang is also falling in love with many other stocks as well. They can’t get enough of them! The bottom line is that we must continue to “just go with the flow” until the flow changes!
And that’s really what we did. Too many stocks had super-jammed, so we settled on MRK which took it’s time and finally responded. The euphoria has gotten too euphoric says our “gut” and we’re certainly late if we’re seeking bullish trades to stay with the trend. We may have to be patient this week as Tuesday this week is the “Monday” of most weeks. Things have gotten statistically absurd so we’re going to need a deft touch. It’s hard to bet against a strong trend like this one but we also know that we’re not early birds if we’re to jump in as big bulls in most stocks right now. We shall do our best!
We’ve included a chart of the SPYs above and pretty much the same can be made of the DIAs and the QQQs. All major indices have gotten stretched to the extreme. Sure, it can get even more stretched but not by that much in most cases. Late to get in yet too early to counter-trend short it. That’s really the story everywhere we look.
A light calendar will be buffered by more and more earnings releases and chatter about a government shutdown. As always, they will make of the news what they most-prefer. We plan to stick and move with whatever planned reactions are brought our way.
We must place this front and center considering the current “stretch” and last and this week’s OA.
From ZH:
Traders have never paid more to place levered long bets relative to downside protection in US equity markets... perhaps that was the final straw on the endless-bull-market-camel's back...
After all that excitement at the open - Dow 26k and nothing can stop me now... Things have gone a lighter shade of pale red with all but The Dow now red for the day...
Notably, as Bloomberg reports, as U.S. stocks trade at all-time highs, the price tag on bearish options has dropped to a trough relative to bullish contracts. The spread between the price of one-month, 25-delta puts and calls for the S&P 500 is roughly two standard deviations below its five-year mean, data compiled by Bloomberg show.
It’s an indication of the greed -- or lack of fear -- in the market suppressing the Cboe’s volatility gauge.
This is a record low skew - bullish/greed - lower than at the peak of the market in 2007...
The persistent decline in put prices -- paying less for downside protection -- drove the downtrend in the measure known as skew during most of last year’s second half. Since Jan. 3, investors chasing upside have led to an increase in the cost of calls, contributing to the historically significant level of bullish positions, the data show.
WE’RE NOT DONE YET!:
It’s not just Morgan Stanley and your friends at Advantage Point that are concerned about the “All Aboard! Everybody to One Side of the Boat!” partying:
https://www.zerohedge.com/news/2018-01-16/bofa-investors-are-long-unprotected-and-partying-its-2019
In Bank of America's latest monthly survey of Fund Managers which polls 183 participants with $526bn in AUM, BofA Chief Investment Strategist Michael Hartnett found what many had expected: euphoria is officially the only sentiment that matters in the market, to wit: "Investors are long, unprotected, & say equity bull market continues to 2019."
As part of this "Party like it’s 2019" mentality, Hartnett believes that the bull capitulation means "a vol spike is imminent but requires surge in inflation & yields to satisfy bond paranoia." Meanwhile, fund managers are rotating into pro-cyclical sectors like tech, industrials, EMs, equities, and out of telecom, bonds, utilities, UK.
THEY…
…CAN’T…
…GET…
…ENOUGH!
AND, THIS IS THE LEAST PROTECTED THEY’VE BEEN IN YEARS…
WITH “VOL” NEAR RECORD LOWS! AND LET’S NOT FORGET THAT “VOL” IS NEAR RECORD SHORTED!
Finally, the “backdrop” from Charles Hugh Smith with a chart of his own that’s much like ours. Behold the extreme RSI and “Verticalness” of it all:
http://charleshughsmith.blogspot.com/2018/01/the-fascinating-psychology-of-blowoff.html
Bank and Roll like an Early MARCH 2000 Nasdaq Player Should Have!
We’re heading back to the “30 Delta Put” discussion we touched on last week.
We’ll use the same graphic but do keep in mind that things have only become even more vertical in the interim!
We noted last week that when indices become too extreme to the bull side, many folks like to set about acquiring OTM 30 Delta Puts on stocks and indexes that they believe are due for a correction. Being that those puts are OTM and thus “cheap” in several ways, the idea makes a lot of sense. First off, as they are relatively “dollar cheap”, many more of them can be acquired vs. costlier (closer to the ATM) puts. Additionally, with the VIX and options in general being so cheap, it’s as if we’re picking up these types of puts on “sale”. Thirdly, they will not only gain in value due to delta and gamma if the markets pull back, but it will be likely that they will also delivery a “volatility pop” for the holder as investors scramble for this very form of insurance as they finally realize that a significant drop is occurring. All of that is well and good except for the fact that if buying the 30 Delta Put is all we do, we’ve taken on nothing but a speculative counter-trend position that’s entirely comprised of EXTRINSIC VALUE! That means we’ll be right up against “it” and by “it” we mean THETA aka DECAY and not the positive kind!
The “theta” concern is what drives us to suggest that folks consider going long the OTM Put Calendar spread. This can even be done in ratio form to balance out theta. Consider this entirely hypothetical example simply to illustrate the point.
Let’s assume that we sell 100 30 Delta Feb 2nd Expiration Puts as we buy 200 March 2nd Expiration Puts at the same strike on the same imaginary stock. If the Feb’s decay at .10 per day but the March’s lose only .05 per day, then we’ve balanced out our theta issue, and yet we have “net long” puts. However…
…We could still treat this as we like and once the markets have broken below a key support level, we could elect to buy back our short puts and live the naked long 30 Delta Put Dream as the indices are cratering, as originally planned of course! At least, this way, we kept our theta under control until it was “go time”. We much prefer this approach if one insists on initiating the put purchase BEFORE the technical signs have confirmed that it is go time. Think about it…
At many, many junctures along the way of even 2017 alone, the markets looked overdone, and yet, they continued higher. Had we “stockpiled” 30 Delta Puts and done nothing beyond that, we’d be holding the bag! (So to speak) That’s the real danger with this approach if it is not actively managed with an eye towards theta hedging. We like the idea, it’s just, all things in moderation...even Crash Bets!
If you have questions, ask away in this week's Advantage Point Morning Call webinar.