Advantage Point Newsletter - October 24th, 2017
• This Week's Trade Ideas:
Bullish: CSX Corp. > CSX > $53.95 Last.
No new bullish ideas at this stage of the rampage. No low risk ideas exist that we could find.
Bullish Mentions: None.
Bearish: Paychex Inc. > PAYX > $63.85 Last. SPECULATIVE
Bearish Mentions: (Only If we see selling again in our lifetimes) LMT, HDS, SYY
• Market Overview:
We’re still where we were last week only at higher prices. What does that mean? Here’s what that means: More room is there if the bulls decide to keep pushing but it’s not that much more room and we’re long past the time where we should have seen a pullback. We all know that it should happen much sooner than later, but we can’t fight against the market yet in the form of a counter-trend trade.
• Below the Radar:
We're jumping around this week as we check on many, many developments of which the markets seem not care…
• Options Academy:
We noted near the end of last week's OA that other considerations were something we might explore this week and so that's what we're going to do! This week, let's address the idea of our real risk (our stop) vs. our reward expectations (targets), and see where that takes us.
Buying on news remains in place. It’s getting stale, very stale, but a little room still remains...
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.
It’s becoming the “same old…” nearly every week and nearly all the time. We haven’t seen too many periods like this one that have sustained themselves for too much longer than what we’ve already seen but one can never know…
Things have gotten quite boring, in a way, and the march higher has become a little more subdued and absurd while remaining technically over-extended. Fortunately, we haven’t picked a fight too soon with the market that simply won’t go down. Every trick has been pulled out to keep the music playing and stock prices moving up. Recently, two rather poorly managed companies, IBM and GE, started to get in on the act of jack up the Dow Jones Industrial Average. Years of bogus accounting aside, Wall St., even if only momentarily, is back in love with Big Blue and General Electric as of late last week. We’re hoping that they reanimate F.W. Woolworth Co. so we can get in on the IPO…
Bullish Ideas:
CSX Corp. > CSX > $53.95 Last. Last week's lone idea is getting stale and has tried several times but not been able to break out above the resistance level we noted. Unless the markets, XTN, and it power higher almost immediately, this may not be worth holding but rather revisiting if there's a breakout above the $55.00 level in a market surge on the next cycle higher if there's to be one.
No new bullish ideas at this stage of the rampage. No low risk ideas exist that we could find.
Bullish Mentions:
None (see above).
Bearish Ideas:
Paychex Inc. > PAYX > $63.85 Last. SPECULATIVE: (See Below;) Buy the Nov. 17th 65 Puts for $2.10 or less with a close or anticipated close below $63.65 in a down market with expectations for continued weakness in the indices. This is a counter-trend idea that probably will need the indices to back off a little from the highs to succeed but it is potentially close to a vulnerable area.
Bearish Mentions:
(Only If we see selling again in our lifetimes)
LMT
HDS
SYY
Outlook:
Almost out of words at this point. This day after day slo-mo melt up currently provides little in the way of easy bullish opportunities and it's yet to fail technically in any way. This would be great for riding longer-term longs but makes for very trying times when seeking new long entries. Big name earnings are looming and thus we're at a 50/50 juncture on what the gang may do next.
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:
Last week we found it even more difficult to find low risk/respectable reward ideas to cover. With so many stocks marked up to such a great degree, we’d be in a position of “chasing” them if we latched on now. That’s something that we try to avoid as it is an approach that has failed us much more often than not over the past few decades.
Our only official idea was a bullish one in the form of CSX. We leaned to the long-side as not to quarrel with an unstoppable buy cycle in the indices and wanted to see improved performance from the XTN ETF to confirm that transports were being bought. To a degree, we got 2 out of 3 with the SPY and XTN generally trying to move up but both weren’t all that impressive and neither has been CSX. We lowered our trigger level to get in a little earlier but we knew that it would take a breakout above near resistance to really ignite CSX for an upside move. We just haven’t gotten it and things are getting stale. If we don’t catch a breakout move soon it may be time to move on and set an alert above resistance should the markets continue to waft higher and CSX finally summons the strength to take out that level with the XTN being bought.
As for all the mentions, we’re going to lump them together and simply state that they were a mixed bag at best. The bear side wasn’t even tradable as we noted in our webinar. We identified, CBS, GLPI, ETFC, and DLPH as names that could be ready to cycle lower if the major indices finally took a long overdue breather. Well, the breather clearly didn’t happen and thus there wasn’t even a chance to look at these within a market weakness environment. As for BKLN, EAT and CXW, the bullish mentions, they were mostly a go-nowhere hodgepodge. Kind of disappointing but when we realize that the SPY and NDX are either barely up or down since last Tuesday, things become clear. The DOW’s records were largely propelled by the aforementioned dubious “ramp jobs” in IBM and GE. After GE was reversed late last week, it was used up and handed the DOW Levitation Baton off to other stocks, CAT and MMM.
We’re still where we were last week only at higher prices. What does that mean? Here’s what that means: More room is there if the bulls decide to keep pushing but it’s not that much more room and we’re long past the time where we should have seen a pullback. We all know that it should happen much sooner than later, but we can’t fight against the market yet in the form of a counter-trend trade. The SPYs and the NDX aren’t looking as strong as the DOW but that can be reversed in no-time, so we need to be patient. Big names will be reporting this week and it’s hard to see how more “beats” won’t be announced and celebrated.
The economic calendar could also help to pump up the euphoria. From Wednesday onward, we’ll see a few notable numbers hit the tape. GDP on Friday could become the figurative spiking of the ball after the touchdown if the bulls have yet another good week. The earnings that we’ve seen indicate that the bulls have a good chance of pulling it off…
The charts below speak for themselves:
"FAANG" is the only clear problem but there's plenty of potential support levels:
We're jumping around this week as we check on many, many developments of which the markets seem not care. We'll start off with some of our own snapshots for backdrop:
As can clearly be seen, the markets have not a care in the world. We've noted the extreme lack of volatility as have many others. As per above, this is the most sustained "greed" period in 3 years. Speaking of "3":
If you were wondering if the record would be broke, the answer is "YES":
By the way, here's why we've been sounding like a broken record (assuming that's still a viable cliché):
2017 continues to break records, as the S&P 500 Index makes new highs amid historically low volatility:
The index has now gone 33 consecutive sessions without a 0.5% daily decline, which is the longest streak since 1995.
The index’s average daily change on an absolute basis so far this year has been only 0.30%, the smallest since 1965.
The index has closed lower 1% or more only four times—the fewest for a full year since 1964.
If you're curious as to why "they" can't let it happen, selling that is, or why if it does happen it could turn very ugly, very quickly, take a long look at the degree of "one sidedness":
Is it any wonder that they've scared nearly all the money out of the "bear side"? It's a record!:
So, YES, they've killed volatility "real dead" along with very nearly all the bears it would seem. It's with this in mind that present the balance of Below the Radar...
A quick check on Europe reveals that:
Spain is experiencing strife:
While Italy may be on the verge of the same:
...while Euroscepticism grows in both countries and beyond:
http://www.zerohedge.com/news/2017-10-22/czech-donald-trump-wins-landslide-victory
And while a way off (it would seem), the political fracturing keeps spreading, even to the Golden State:
And then there's the fracturing of the people from their government all across the USA:
https://blogs.chapman.edu/wilkinson/2017/10/11/americas-top-fears-2017/
74% of Americans fear corruptions of government, which is the top fear at the moment!
There's also more "fear" news in Germany and the USA, Germany first:
And now for some good old Cold War nostalgia only, but not really:
In true Pentagon fashion they disputed the bomber news so we'll have to wait and see on that one.
Harkening back to the early 70's, investigations are popping up everywhere. Here are a few recent developments on that front:
And with that both major political influence peddling organizations, err "parties", are at risk:
http://nypost.com/2017/10/23/now-democrats-have-a-russia-problem/
Despite all this, there's other uncertainties too:
Few, very few, seem to see it however:
There's never been a better time and they don't ring a bell...
That about ends our "Lack of Fear" World Tour but we'll be back next week with more of what not to be fearful of.
We don't want yout to worry. Really, don't worry, if all else fails the Chinese government will be there in the end to bail us all out much like they're bailing out their own bubble-icious real estate market to the tune of 24%:
The "new normal" keeps on working...
For perspective, we're reprinting last week's Options Academy below this week's. (See far below)
We noted near the end of last week's OA that other considerations were something we might explore this week and so that's what we're going to do!
This week, let's address the idea of our real risk (our stop) vs. our reward expectations (targets), and see where that takes us.
Prior to pushing AAPL out there as a late in the week bullish mention as it closed near $156.00, we noticed that the $155.00ish level was key nearby support. There are a few ways we can go with stop-loss concepts but a tight stop is not one we prefer! A tight stop would be set just below $155.00 and acted on if AAPL traded say 1c or 5c below $155.00. We prefer to let our trades breathe a little more than that. If another key support level isn't nearby that we can lean on as our "secondary stop" that's based on solid technical work, we're often left grasping for arbitrary stop-loss levels. For our purposes here, let's go with the "1% close below support" approach. In this case, that would work out to be:
$155.00 is our support level thus $155.00 * 1% = $1.55.
Next, we can subtract that amount from the support-level. $155.00 - $1.55 = $153.45.
$153.45, on a closing basis, becomes our stop-loss level.
Now let's go back to last week's various AAPL options that we could have purchased with the stock price at $156.00:
85 Delta 146 Call = $10.95ish
65 Delta 152.5 Call = $6.05ish
46 Delta 157.5 Call = $3.30ish
27 Delta 162.5 Call = $1.55ish
We'll utilize the Greeks from our "get in" snapshot we took last week and we'll assume that we had a bad entry. We're using the Greeks to show how we can "ballpark" results from our projected outcomes. We'll assume that in a short period of time, we were forced to close out a bad trade, let's assume 1 day. This will help us avoid the "messiness" of factoring in changing vegas and thetas, thus we're only considering delta and gamma and 1-day worth of theta. The Greeks are non-linear so we're keeping the extrapolations simple but admittedly not perfect as a result.
Let's cover the loss side first. If we got long at about $156.00 and closed out a losing trade at $153.45, a price drop of $2.55, our assorted options would have produced the following approximated results. Each dollar and then partial dollar drop in AAPL's stock price would have produced the following:
85 Delta 146.0 Call = $10.95 >>> -$0.85, -$0.83 and ((.81*$0.55) = -$0.45) - $0.06 of theta = $2.19 loss
Thus the 85 Delta Call would be worth $8.76 at closure ($10.95 - $2.19)
$2190.00 loss on a 10 lot of Calls
20% Loss of Capital but 80% of Captial Remains
65 Delta 152.5 Call = $6.05 >>> -$0.65, -$0.61 and ((.57*$0.55) = -$0.31) - $0.08 of theta = $1.65 loss
Thus the 65 Delta Call would be worth $4.40 at closure ($6.05 - $1.65)
$1650.00 loss on a 10 lot of Calls
27% Loss of Capital but 73% of Captial Remains
46 Delta 157.5 Call = $3.30 >>> -$0.46, -$0.42 and ((.38*$0.55) = -$0.21) - $0.09 of theta = $1.18 loss
Thus the 46 Delta Call would be worth $2.12 at closure ($3.30 - $1.18)
$1180.00 loss on a 10 lot of Calls
36% Loss of Capital but 64% of Captial Remains
27 Delta 162.5 Call = $1.55 >>> -$0.27, -$0.24 and ((.21*$0.55) = -$0.12) - $0.07 of theta = $0.63 loss
Thus the 27 Delta Call would be worth $0.92 at closure ($1.55 - $0.63)
$630.00 loss on a 10 lot of Calls
40% Loss of Capital but 60% of Captial Remains
Now, onto the profit side of things. One of the initial technical targets that we noticed in AAPL at the time was resistance area from $160.00 to $161.00. If we split that difference we can use $160.50 as a sample exit target to produce the following purely hypothetical results:
85 Delta 146.0 Call = $10.95 >>> ($4.5 of upward movement with gamma & theta factored)
+$0.85, +$0.87, +$0.89, +$0.92and ((.94*$0.50) = +$0.47) - $0.06 of theta = $3.94 gain
Thus the 85 Delta Call would be worth $13.06 at closure ($10.95 + $3.94)
A $3940.00 gain on a 10 lot of Calls, a 36.0% Return on Captial
65 Delta 152.5 Call = $6.05 >>> ($4.5 of upward movement with gamma & theta factored)
+$0.65, +$0.69, +$0.73, +$0.77 and ((.80*$0.50) = +$0.40) -$0.08 of theta = $3.16 gain
Thus the 65 Delta Call would be worth $7.72 at closure ($6.05 + $3.16)
A $3160.00 gain on a 10 lot of Calls, a 52% Return on Capital
46 Delta 157.5 Call = $3.30 >>> ($4.5 of upward movement with gamma & theta factored)
+$0.46, +$0.50, +$0.54, +$0.58 and ((.60*$0.50) = -$0.30) - $0.09 of theta = $2.29 gain
Thus the 46 Delta Call would be worth $5.69 at closure ($3.30 + $2.29)
A $2290.00 gain on a 10 lot of Calls, a 69% Return on Capital
27 Delta 162.5 Call = $1.55 ($4.5 of upward movement with gamma & theta factored)
>>> +$0.27, +$0.30, +$0.33, +$0.36 and ((.38*$0.50) = +$0.19) - $0.07 of theta = $1.38 gain
Thus the 27 Delta Call would be worth $2.93 at closure ($1.55 + $1.38)
A $1380.00 gain on a 10 lot of Calls, an 89% Return on Capital
To sum up:
On the 85 Delta call we risked $2190 expecting to make $3940 for a 1.8 Reward to Risk Ratio
On the 65 Delta call we risked $1650 expecting to make $3160 for a 1.91 Reward to Risk Ratio
On the 46 Delta call we risked $1180 expecting to make $2290 for a 1.94 Reward to Risk Ratio
On the 27 Delta call we risked $630 expecting to make $1380 for a 2.19 Reward to Risk Ratio
As we can see, there's not much of an "R to R" difference except in the case of the 27 delta OTM call. It dazzles when we have a very strong move in a short period of time. Otherwise, the other options could have performed well. Is there a "one right way" answer to the selection-process? There's so many ways to go, things to consider, unknowns etc. If we assume that it would take quite a while, not move up as sharply, we know that the ITMs would mitigate our theta risk while the OTMs would not. It's always in the eye of the beholder at the beginning of the process followed by the roll of the dice in the end.
Last Week's Option Academy Reprint:
This week we're going to delve into something simple that we often take for granted but do it in a different way.
On Thursday of last week, we put out a bullish mention on Apple and later on it closed out the day at $156.00. We didn't provide any options details as it was merely a mention that resulted from our main bullish stock ideas being undermined earlier in the week. Regular readers and attendees know that we prefer slightly ITM options around the 65-70 delta range for our swing trading purposes. We normally go out a full 2 to 4 weeks in time and slide more towards the "4 week" end of the spectrum when it makes sense to do so.
Our preferences are our preferences but here's another way to look at the same thing.
We highlighted 4 different options 3 weeks out in time (splitting our 2 – 4 week preference). Let's look at the 85, 65, 46 and 27 delta calls. The represent the deep ITM, the slightly ITM, the ATM and the OTM respectively albeit imperfectly. We'll use mid-market as fair value for each. So...
Had you bought each strike the prices would have been approximately:
85 Delta 146 Call = $10.95ish
65 Delta 152.5 Call = $6.05ish
46 Delta 157.5 Call = $3.30ish
27 Delta 162.5 Call = $1.55ish
Now let's jump ahead to yesterday's closing prices:
Let's update now with values set again at mid-market:
85 Delta 146 Call = $14.50ish
65 Delta 152.5 Call = $8.85ish
46 Delta 157.5 Call = $5.25ish
27 Delta 162.5 Call = $2.72ish
Here's a profit breakdown on each call given the closing prices vs. the opening prices:
The 85 Delta Call produced a $3.55 profit and thus a 32.5% ROI.
The 65 Delta Call produced a $2.80 profit and thus a 46% ROI.
The 46 Delta Call produced a $2.25 profit and thus a 68% ROI.
The 27 Delta Call produced a $1.17 profit and thus a 75% ROI.
One thing that really jumps out is the 27 vs. The 46 delta call. The ROI seekers may like the 7% extra return but the bottom line is that the 27 delta call barely made half of what the 46 delta call did when measured in dollar profits.
Another interesting item is the dollar profits of the 65 delta vs. those of the 85 delta call when compared to the outlay for each. The cost of the 65 delta call was $6.05ish vs. $10.95ish of 85 delta call which means the 65 delta call cost 55% of the price of the 85 delta call. However, it delivered 79% of the dollar profits of the 85 delta call.
There are other things we can look at such as the real risk (our stop) to the real reward (our target) and the ratios that flow from that and consider what happens if "we're wrong" on the idea or we're forced to wait before bailing. Perhaps that will be worthy of picking up next week.
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team