Global Market Comments
July 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GETTING INTO STUDIO 54),
(AAPL), (AMZN), (TSLA), (GOOGL), (FB), (NVDA), (TLT)
Posts
Global Market Comments
July 23, 2021
Fiat Lux
Featured Trade:
(INDUSTRIES YOU WILL NEVER HEAR FROM ME ABOUT)
(AMZN), (DIS), (FB), (MSFT), (VIX)
Global Market Comments
July 22, 2021
Fiat Lux
Featured Trade:
(HOW DID THOSE TECH LEAPS WORK OUT?)
(AAPL), (AMZN), (MSFT)
A month ago, I sent you a research piece about the merits of long-term LEAPS in the major technology stocks (click here for the link).
They included:
Amazon (AMZN) January 2022 $3,200-$3,400 vertical bull call spread
Microsoft (MSFT) January 2022 $240-$270 vertical bull call spread
Apple (AAPL) January 2022 $120-$130 vertical bull call spread
So, how did those work out? Here is the stock performance and the LEAPS performance for each position:
Amazon (AMZN) stock +11.40% LEAPS +26.79%
Microsoft (MSFT) stock +7.69% LEAPS +35.38%
Apple (AAPL) stock +13.38% LEAPS +30.92%
In other words, the LEAPS outperformed the stock to the upside by anywhere from 2.5X to 5X. All three positions are now deep-in-the-money. As long as the stocks close at or above the upper strike prices by the January 16, 20222 option expiration day, they will all produce profits of 100% or more in only seven months!
It goes to confirm the strategy that I have been vociferously arguing in recent months, that LEAPS offer far and away the best risk/reward of any investment in current market conditions. Whenever I have a payday, I pour the money straight into my retirement funds and into the most attractive LEAPS.
The liquidity for long-dated options is not that great. That is why entering limit orders in LEAPS only, as opposed to market orders, is crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Like all options contracts, LEAPS give its owner the right to exercise the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If LEAPS expire "out-of-the-money" on expiration day, you can lose all the money you spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer vastly more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present hugely outsized profit opportunities.
For the right investor, they are the ideal instrument.
So, let’s get on with my specific math for the (AMZN) LEAPS to discover its inner beauty.
By now, you should all know what vertical bull call spreads are. If you don’t, then please click this link for my quickie video tutorial (you must be logged in to your account). Warning: I have aged since I made this video.
A month ago, Amazon closed at $3,346.83.
The cautious investor should have bought the (AMZN) January 2022 $3,200-$3,400 vertical bull call debit spread for $102. One contract gets you a $10,000 exposure. This is a bet that (AMZN) shares will close at $3,400 or higher by the January 22, 2022, option expiration, some 1.6% higher.
Sounds like a total no-brainer, doesn’t it?
Here are the specific trades you needed to execute this position:
expiration date: January 21, 2022
Portfolio weighting: 10%
Number of Contracts = 1 contract
Buy 1 January 2022 (AMZN) $3,200 call at………..….……$374.00
Sell short 1 January 2022 (AMZN) $3,400 call at…………$272.00
Net Cost:………………………….………..………….............….....$102.00
Potential Profit: $200.00 - $102.00 = $98.00
(1 X 100 X $98.00) = $9,800 or 96.07% in six months.
In other words, your $10,200 investment turned into $19,800 with an almost sure bet giving you a profit of 96.07%.
Why do a vertical bull call debit spread instead of just buying the January 2022 (AMZN) $3,400 calls outright?
You need a much bigger upside move to make money on this trade. (AMZN) would have to rise all the way to $3,674 to break even on the calls, and all the way up to $3,772 to match the profit of the call spread.
While I think it is possible that (AMZN) could rise that much by January, it is vastly more probable that (AMZN) will be over $3,400 by then. That is what hedge funds do all day long, and that is to find the most probable trade out there and then leverage up like crazy.
Remember, one call option gives you the right to buy 100 shares. That means over $3,400 your call spread that cost $10,200 will enable you to control 100 shares of Amazon worth $340,000. The potential upside leverage over $3,400 is 33.33X!
By paying only $102 for the spread instead of $274.00 for an outright call-only position, you can increase your size by 2.68 times, from 1 to 3 contracts for the same $10,200 commitment. That triples your upside leverage on the most probable move in (AMZN), the one above $3,400. That increases the upside leverage over $3,400 to an impressive 100X compared to the outright call buy.
How could this trade go wrong?
There is only one thing. We get a new variant on Covid-19 that overcomes the existing vaccines and brings a fourth wave in the pandemic.
In this case, (AMZN) doesn’t rise above $3,400 but crashes down to the $1,700 low we saw during the 2020 pandemic. We go back into recession. Both of the above positions go to zero. But if we get a fourth wave, you are going to have much bigger problems than your options positions.
So there it is. You pay your money and take your chances. That's why the potential returns on these simple trades are so incredibly high.
If you are interested in getting a more dedicated LEAPS service from the Mad Hedge Fund Trader, you might consider our Concierge service, which costs $10,000 a year and is by application only. If interested, please email support@madhedgefundtrader.com and put Concierge candidate in the subject line.
Enjoy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Tech LEAPS are the Way to Go
Global Market Comments
July 21, 2021
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (FB)
Global Market Comments
July 19, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE DELTA CORRECTION IS HERE)
(AMZN), (AAPL), (FB), (MSFT), (TAN), (FSLR)
Mad Hedge Technology Letter
July 16, 2021
Fiat Lux
Featured Trade:
(THE CLOUD)
(AMZN), (GOOGL), (CRM)
Global Market Comments
July 16, 2021
Fiat Lux
Featured Trade:
(JULY 14 BIWEEKLY STRATEGY WEBINAR Q&A),
(JPM), (MS), (GS), (TLT), (TBT), (CRSP), (AAPL), (TSLA), (QS), (SPCE), (AMZN),
(FCX), (FEYE), (PANW), (HACK)
Global Market Comments
July 14, 2021
Fiat Lux
Featured Trade:
(TEN TECH TRENDS DEFINING YOUR FUTURE, or THE BEST TECH PIECE I HAVE EVER WRITTEN)
(TSLA), (GOOG), (AMZN), (AAPL), (CRSP)
Chinese regulators announced on our Independence Day that they were banning downloads of Uber’s China DiDi in the app stores in the country because it poses cybersecurity risks and broke privacy laws.
This was after DiDi raised $4.4 billion by listing its shares in New York.
However, unnamed sources leaked that China's cybersecurity watchdog suggested to DiDi that it delay its IPO before it happened.
Delaying a wealth generating event like the IPO is controversial.
At this point, DIDI, the Uber of China, is worth a speculative trade at $1 and that’s if the Chinese tech firm doesn’t delist before that.
No — scratch that — it’s not even worth your time at $1 if you hold currency denominated in USD or anything even half as credible.
But if you’re from somewhere like Venezuela wielding infamous bolivars then take a wild stab around $1 or double up at $0.50 for a trade.
There is a reason that I have never in the history of the Mad Hedge Technology Letter recommended buying a Chinese technology stock.
The astronomical risk isn’t justified.
The evidence is now out in public with Chinese big tech and the Chinese Communist Party (CCP) airing their dirty laundry.
Most sensitive business dealings are usually dealt with in-house in the land of pan-fried dumplings and Beijing roasted duck, so things must be spiraling out of control on the inside.
No doubt that inflation spikes are causing chaos everywhere, but China is particularly vulnerable because of the high volume of Chinese living in poverty.
It’s unrelated to this IPO, but another valid reason why Chinese “growth” is weakening fast.
Stateside, cashing out is normal for tech growth companies who want to reward earlier seed investors, their own management teams, and in this case the early-stage investors were Japanese Softbank (21.5%), Silicon Valley’s Uber (12.8%), and China’s Tencent (6.8%).
This was pretty much a big middle finger to these three along with the other Chinese investors which were about to profit big.
This is on the heels of the CCP nixing the Jack Ma Alipay IPO.
Chinese big tech has gone from darlings to pariahs in a short time proving that in the U.S., you get too big to fail, but in China, you get too big to exist.
Silicon Valley tech princelings are also validated for leaving China such as Facebook (FB), Google (GOOGL), Amazon (AMZN) and Netflix (NFLX).
If local Chinese tech can’t flourish in China, then forget about foreign tech in China.
It’s a non-starter.
Apple (AAPL) is the only exception because they are grandfathered in when China had no smartphone and now they provide too many local jobs to be kicked out.
There is definitely a plausible case that U.S. retail investors who were part of that $4.4 billion holdings should be refunded their capital because DiDi didn’t truthfully disclose the risk of potential Chinese regulations properly.
There is also the logic that Chinese companies should never be able to list in New York in the first place which would be sensible.
As it stands, Chinese companies don’t need to follow U.S. GAAP accounting standards and cannot be prosecuted by the U.S. legal system if they commit fraud, embezzlement, or any other financial crime and decline to leave Chinese soil.
This incentivizes Chinese companies listed in the U.S. to cheat U.S. investors with fraudulent accounting and deceitful behavior because they aren’t accountable at the end of the day.
The Invesco Golden Dragon China ETF (PGJ), which tracks the performance of US-listed Chinese stocks, has lost more than one-third of its value since February.
I can tell you from close friends who call themselves frontier investors that investing in China is not worth your time and the fear of missing out (FOMO) rationale is all marketing chutzpah and nothing much else.
China’s economy hasn’t had any positive growth in the past 10 years according to Chinese insiders off record.
This FOMO narrative is often peddled by Wall Street “professionals” who are making exorbitant fees for selling retail investors Chinese junk stocks masquerading as real companies.
Out of many financial pros I have talked to, China leads in terms of horror stories from foreign investors.
The Chinese financial system is a hoax created to lure foreign capital in and for it to never leave often viewed as a free lunch for the local recipients.
And I am not only talking about Chinese tech, but this phenomenon also extends to every reach of the financial system there.
At the end of the day, China’s tech aristocracy wished they originated in the United States which is why they went public here because our markets work and theirs don’t.
They got to New York in the first place by marketing false numbers to U.S. investors and concealing regulatory issues, and U.S. investors must not fall for this trap.
If you look at the Shanghai Stock Exchange Composite Index ($SSEC), it’s gone nowhere in the past year and rightly so.
Even Chinese investors don’t buy Chinese stocks because there is no trust in their financial system. They buy property instead or buy U.S. tech stocks.
Don’t be the next sucker.
