Followers of the Mad Hedge Fund Trader alert service have the good fortune to own deep in-the-money options positions that expire on Friday, October 15, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
(MSFT) 7/$200-$210 call spread 10.00%
(NVDA) 7/$120-$130 call spread 10.00%
(TSLA) 7/$500-$550 call spread 10.00%
(BRKB) 7/$220-$230 call spread 10.00%
(TLT) 7/$119-$122 put spread 10.00%
Provided that we don’t have another 2,000-point move down in the market this week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our deepest in-the-money position, the Tesla (TSLA) July 2022 $500-$550 vertical bull call spread, which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $50.00 expiration value - $42.00 cost = $8.00 net profit
(2 contracts X 100 contracts per option X $8.00 profit per option)
= $1,600 or 19.05% in 21 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, July 18 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday July 15. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/09/john-and-girls.png322345Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-13 10:02:382022-07-13 11:45:31How to Handle the Friday, July 15 Options Expiration
By the time Twitter (TWTR) gets this acquisition through the courts which is now estimated as much as 5 years, Twitter will be bankrupt.
There will naturally be some movement before then.
Regardless of timing, Twitter shares are set to plunge. And you can't then blame Elon Musk for Twitter's demise and poor management.
In fact, Twitter is quite infamous in Silicon Valley for one of the worst management teams and this open secret has come back to hurt them in the wallet.
This is highly bullish for Tesla’s (TSLA) stock because it avoids Musk’s capital getting tied up in an overpriced Twitter deal.
TSLA stock bounced on this news and even if he does reverse course and buy Twitter for a discount as it drops fast, it will be seen as a great bargain for Musk and TSLA shares.
Tesla’s CEO announced his plans to buy social networking site Twitter in April for $44 billion and many thought this wasn’t a serious offer to begin with.
The contract says that Musk is required to pay a $1 billion breakup penalty and he has indicated that he is also trying to get out of that.
I believe Twitter was foolish in setting such a low break-up fee for the richest man in the world.
For most people, a $1 billion fee would be astronomical, but not when one can just liquidate a few odd Tesla shares with a snap of the fingers.
This low fee has been exploited and leveraged to get what he wants because he doesn’t care if he has to pay it.
In hindsight, management should have set Twitter’s breakup fee at a level which would have hurt the richest man in the world meaningfully and created a massive windfall for Twitter.
They didn’t and now the circus begins and who knows when, who, and how much will be the payout if any.
My guess is a termination fee of something around $10 billion would have been quite painful and cost-prohibitive for Musk.
Readers should remember that Musk offloaded $4 billion of Tesla shares around April to pay for Twitter. He sold out at all-time highs and so even if he paid back the $1 billion, the penalty is largely blunted by shifting around his resources.
My guess is that Musk exploits this situation to drain Twitter of its financial resources while buying its stock on the way down.
After he beats the company into submission, there will likely be a huge discount.
If the stock goes to $25, he’ll get a 60% discount on what at first would have been a $44 billion price tag.
Twitter has been fooled big time, made to look incompetent which exactly was the working assumption taken into this deal, which management has totally botched.
TWTR is trading at $34 today which is a far cry from the $54.20 he agreed to buy Twitter at.
This isn’t about Musk because everyone with half a brain would pull out of this deal with a deleveraging tech bubble.
My bet is Twitter slowly grinds lower and Musk finds a way to get Twitter on the cheap then fires the whole management team.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-11 15:02:212022-07-12 10:10:12Toying With Bad Management
As the bear market rally picked up steam Tuesday with even Cathy Wood’s growth ETF (ARKK) gaining 9%, it’s clearly a reaction to the Nasdaq repricing its biggest underlying risk.
The market is now pricing in a global recession and that has replaced inflation as the number one worry for investors.
This new development has led to the Nasdaq sniffing out the return to the bad news is good news effect.
That is why the U.S. 10-year treasury yield cratered from 3.5% to 2.8% which reflects the future expectation of a pulled-forward global recession.
This would trigger a fresh interest rate lowering cycle by global central banks.
Lowering rates is good for Nasdaq stocks and tech stocks will be a big beneficiary of lowered rates as they have overshot to the downside on this rate rise cycle.
That doesn’t mean it’s all rosy in the land of the Nasdaq, hardly so.
We are still in the fog of war and amid improving technical data like lower oil prices, worsening economic relations between the large nuclear-equipped countries are not only moving the world towards a soft technological decoupling but a hard fracturing of general relations.
My first thought was will China finally strike back against the United States in the form of destroying Tesla’s (TSLA) Gigafactory in Shanghai or blacklist Apple (AAPL) iPhones in China.
These two events would be the point of no return for the two countries’ economic cooperation and anything beyond that, relations could spiral out of control rapidly and even be the impetus for a Taiwan takeover.
Clearly, Silicon Valley does much better when the world is getting along, and everyone is paying for their stuff.
That can’t happen as smoothly with the world rapidly balkanizing which is a big reason for massive selloffs in Netflix whose international audience has soured.
On the production side of things, Chinese-produced stuff won’t be able to get sold back to Americans using Guangdong factory production as semiconductor chips and equipment have become the focal point of national security efforts.
The US has placed export controls against Chinese technology firms from purchasing chips and equipment.
Now Biden is blackmailing the Netherlands to ban one of its top chipmakers from selling semiconductor equipment to Chinese companies.
The Biden administration is pushing hard for Dutch chip equipment maker ASML Holding NV (ASML) to halt selling some of its older deep ultraviolet lithography, or DUV, systems.
Even though these machines are one generation behind cutting-edge, they offer high-tech chips for automobiles and consumer electronics.
Washington has also pressured Japan to stop shipping semiconductor machines to China.
Since the Trump tariffs, China has been the biggest buyer of chipmaking gear for the last two years.
On the European front, regulation is hitting home hard as the U.K. has initiated investigations on Amazon’s selling practice by in-house brands and is looking into Microsoft’s anti-competitive acquisition of Activision.
If American tech companies have nowhere to produce, nobody to acquire for instant growth, and nobody to sell to then it becomes a massive issue for shareholders.
Even though the equity mojo boost of good news is bad news is a nice reprieve, a global recession where many companies fire staff and can’t sell their product because lack of parts is worse.
Therefore, we are still issuing a sell the rallies in tech type of recommendation to our readers while acknowledging there has been a small wave of dip buyers entering back into the game.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-06 16:02:362022-07-06 16:30:07Good News Is Bad News
More than six months after what appeared to be a never-ending assault on the biotechnology and healthcare industries, the sector seems to be slowly reviving.
While it is still too early to declare the pullback over, there are a few companies that provide a ray of hope for investors.
In the US, only four stocks have recorded a market capitalization of $1 trillion or higher: Apple (APPL), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT). This year's market crash saw Tesla (TSLA) and Meta Platforms (META) departure from this elite group.
The market-wide selloff also made it more difficult for stocks to reach the $1 trillion mark. However, this does not necessarily preclude them from achieving this goal in the future.
Companies are rapidly expanding and equipped with the right tools and strategies to capitalize on growth opportunities, making them prime candidates to make the $1 trillion cut in a couple of years.
One of them is Johnson & Johnson (JNJ).
Almost everyone is familiar with JNJ's century-old brands, such as Band-Aids and Listerine. What many people probably do not realize is that the company's med-tech and pharmaceutical segments account for the vast majority of its total revenue.
In 2021, its pharmaceuticals segment alone comprised 55% of JNJ sales, while its medical devices unit contributed 29% to the company’s top line.
So far, the most promising drug in JNJ’s pharmaceutical segment is Tremfya. First-quarter sales for this psoriasis treatment jumped to a whopping 41% year over year to record an annualized $2.4 billion.
Meanwhile, JNJ's med-tech segment is poised for massive growth as a result of the strong demand for its electrophysiology products. These devices, used to keep hearts beating normally, have been identified as lucrative revenue streams and growth drivers in the long run.
The company has been working on spinning off its consumer segment into a separate publicly traded entity in the following months. This means that investors with JNJ stock will eventually end up owning shares of two different companies by 2023.
The decision to spin off its consumer health segment is part of the company's effort to shed a cyclical segment and become a health pure play focused on pharmaceuticals and medical devices.
Hence, now is an excellent time to buy JNJ shares.
While JNJ isn’t known as a high-growth stock, the company’s strategies have the potential to spur exponential growth and send shares soaring.
The next decade will be crucial for the company's success as it transforms. If the company executes its plans successfully, its current market capitalization of $467 billion could slowly but steadily increase to approximately $1 trillion.
J&J will be able to invest and concentrate its resources on segments with high sales and margins, which should increase the company's income and cash flows at a faster rate than at present.
Furthermore, JNJ's plan is expected to increase shareholder returns through higher dividends and share repurchases because of its growing cash flow. With these factors combined, JNJ's stock price will undoubtedly rise, as will its market cap.
On top of these, JNJ offers a 2.6% dividend yield. Admittedly, this isn’t remarkably high. However, investors can rely on its steady rise. Moreover, JNJ is a Dividend King. In fact, it recently raised its payout for the 60th year in a row.
If these aren’t enough to cement the company’s reputation as a solid investment, consider the fact that JNJ is one of the largest holdings in Warren Buffett’s (BRK.A) portfolio.
It’s also one of the only two publicly traded companies with the coveted AAA credit rating from S&P. For context, the US government only has an AA rating. Needless to say, this makes JNJ one of the safest—if not the safest—income stock to date.
Overall, JNJ has been diligent in getting all of its ducks in a row and is poised to provide market-beating returns to patient investors.
Any doubts that financial markets are fully discounting a recession were completely smashed last week.
It isn’t just the economic data that are rolling over like the Bismarck. Oil plunged 19%, copper is off 22% from its top, and bond yields have collapsed an astonishing 46 bases points in only two weeks, from 3.48% to 3.02%, a cataclysmic move in the bond market.
Asset classes most sensitive to a recession, like industrial commodities, suffered the biggest falls. That’s because if commodities don’t get used immediately they have to be stored at great expense and a million barrels of oil don’t look very pleasant in your backyard.
How did the stock market respond? It loved it. Stocks delivered the first positive week in June. The Dow Average rallied a healthy 1,900 points off the bottom, some 6.41%.
So what gives? Why is every asset class in the world getting trashed while stocks rocket?
It's really very simple. Stocks love lower interest rates. Cut borrowing costs and equities catch a bid. Lower rates more and stocks should further appreciate.
It's not like we are out of the woods yet. We could get another interest rate spike as we move into the next Fed move on interest rates on July 27. That could take us to new lows in stocks, but not by much. Any declines from here will be limited and are worth buying, as I have been arguing for weeks.
Always focus on what is going to happen next for we are in the “what happens next business.”
While broker reports, research, and the news focus on what happened in the past, or rarely today, it is what happens next that determines the performance of your investment portfolio.
Live in the future and there are never any surprises, only rewards. Powell Highlights the Fed’s Inflation Commitment, even though the principal drivers, OPEX+ and the Ukraine War, are completely out of his control, in testimony in front of congress. The next two 75 basis point rate rises are a sure thing. Number three won’t happen if a recession kicks in before then.
Oil Dives as Recession Fears Mount, off 20% in a week. Oil is the last thing you want to hold going into a recession, as storage fears are at record highs a few tankers are available for charter. Avoid all energy plays like the plague. Too many other better fish to fry.
American Airlines, United Airlines, and Delta are Cutting Routes, to deal with staff shortages. Small cities where no money is made, like Toledo, Islip, and Dubuque are the main targets. Reno lost much of its airline services in the last recession for the same reason.
A Real Estate Selloff is Going Global, the effect of rising interest rates worldwide. Auckland, New Zealand, Vancouver, Canada, and Sydney, Australia have suddenly seen homes go heavily offered as free money disappears. The US could be next. In Incline Village, NV homes priced under $1 million are seeing aggressive price cuts to sell, while those over $5 million are maintaining prices.
Electric Vehicles Could Reach a 33% Market Share by 2028 and 54% by 2035, says AlixPartners, a research firm. Automakers are going to have to invest $526 billion to meet this demand. EVs are becoming a dominant factor in the US economy. Keep buying (TSLA) on dips, which has a 12-year head start over everyone and has an 80% global EV market share. You just missed a chance to buy the shares at $635 last week.
Existing Home Sales plunge 3.4% in May to 5.41 million units, Dow 8.6% YOY. Inventories fell slightly, with 1.16 million homes for sale. The median home price rose to a new all-time high of $407,600. Home sales priced under $250,000 are down 27% YOY. Mansions are still selling well nationally.
Industrial Production rises by a modest 0.2% in May. Their recession hasn’t hit here yet.
Bitcoin hit a $17,900 low Asian trading. Bitcoin crash is particularly compelling to watch as it has become a great risk indicator for all asset classes. Ignore it at your peril. It turns out that the wonder of 24/7 trading means it can go down a lot faster. I have no idea where the bottom is so don’t ask. This amount of fear is impossible to quantify.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my June month-to-date performance exploded to +9.99%.
My 2022 year-to-date performance ballooned to 51.86%, a new high. The Dow Average is down -13.22% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 73.27%.
That brings my 14-year total return to 564.42%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.85%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 87 million, up 300,000 in a week and deaths topping 1,016,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 27 at 8:30 AM, US Durable Goods for May are released.
On Tuesday, June 28 at 7:00 AM, the S&P Case Shiller National Home Price Index for April is out.
On Wednesday, June 29 at 7:00 AM, the final read of the US Q1 GDP is published.
On Thursday, June 30 at 8:30 AM, Weekly Jobless Claims are announced. We also get US personal Income & Spending.
On Friday, July 1 at 7:00 AM, the ISM Manufacturing PMI for June is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, as this pandemic winds down, I am reminded of a previous one in which I played a role in ending.
After a 30-year effort, the World Health organization was on the verge of wiping out smallpox, a scourge that had been ravaging the human race since its beginning. I have seen Egyptian mummies at the Museum of Cairo that showed the scarring that is the telltale evidence of smallpox, which is fatal in 50% of cases.
By the early 1970s, the dreaded disease was almost gone but still remained in some of the most remote parts of the world. So, they offered a reward to anyone who could find live cases.
To join the American Bicentennial Mt. Everest Expedition in 1976, I took a bus to the eastern edge of Katmandu and started walking. That was the farthest roads went in those days. It was only 150 miles to basecamp and a climb of 14,000 feet.
Some 100 miles in, I was hiking through a remote village, which was a page out of the 14th century, back when families though buckets of sewage into the street. The trail was lined with mud brick two-story homes with wood shingle roofs, with the second story overhanging the first.
As I entered the town, every child ran to their windows to wave, as visitors were so rare. Every smiling face was covered with healing but still bleeding smallpox sores. I was immune, since I received my childhood vaccination, but I kept walking.
Two months later, I returned to Katmandu and wrote to the WHO headquarters in Geneva about the location of the outbreak. A year later I received a letter of thanks at my California address and a check for $100. They told me they had sent in a team to my valley in Nepal and vaccinated the entire population.
Some 15 years later, while on customer calls in Geneva for Morgan Stanley, I stopped by the WHO to visit a scientist I went the school with. It turned out I had become quite famous, as my smallpox cases in Nepal were the last ever discovered.
The WHO certified the world free of smallpox in 1980. The US stopped vaccinating children for smallpox in 1972, as the risks outweighed the reward.
Today, smallpox samples only exist at the CDC in Atlanta frozen in liquid nitrogen at minus 346 degrees Fahrenheit in a high-security level 5 biohazard storage facility. China and Russia probably have the same.
That’s because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19th century and were buried on the north coast of Greenland, remaining frozen ever since. If you need a new smallpox vaccine, you have to start from somewhere.
As for me, I am now part of the 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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