This Week in Barrons: 11-22-2020:
Learn How to Use Options…
From the week before Thanksgiving until just after Christmas, there will be more expert opinions than people will want to hear. In Europe, we get the benefit of the brokerages that offer leveraged products, and are required to report their client success rates. Europe’s ‘leveraged products’ are strictly directional (‘all in’) types of plays. You either bet that something is going to rise or fall. Now, you would think the average success rate would be around 50%. I mean direction is somewhat of a coin toss – yes? Well in reality, the success numbers average closer to 25%. Yes, with all of the information currently at our fingertips – European brokerage houses are making the wrong directional decision 75% of the time. I (however) tend to think of options as a ‘strategic / probability’ element surrounding a trade. Options cannot guarantee positive outcomes, but do behave along statistical lines. Learn how to use options strategically / with the probabilities on your side – because it will tilt the odds in your favor.
The Market:
Which is better: feeling like you were right from the beginning, or actually being correct now? When we double down on our original estimate, defend our sunk costs, and rally behind the home team – we’re doing it because it feels good. On the other hand, if the outcome is important and we have the cajoles to say, “based upon what we now know” – the new/revised path is always the more successful way to go forward. Flexibility in the face of change gives way to resilience. Remember the phrase: “He who laughs last – laughs best.” Statistically, it’s always better to be correct now (and future now’s) – than ‘right’ only at the beginning.
InfoBits:
- DoorDash is the #1 food deliverer in the U.S…. with 50% market share. Sales have more than tripled. They have 18m customers, 1m Dashers, and 390k merchants now on their platform. BUT, they’re still not profitable.
- Consumer sentiment dropped… due to the presidential election and surging COVID cases.
- Moderna and Pfizer both have mRNA vaccines… which are faster and cheaper to make than traditional vaccines, but have never been approved for human use. And both have said they're planning to sell them for a profit.
- Gourmet food deliverer Goldbelly… has 2X'd its restaurant / customer count.
- Airbnb has filed… to go public.
- Bird, the electric scooter company… is SPAC’ing with Credit Suisse.
- Jay Clayton will step down… as chairman of the SEC at year-end.
- Twitter just named hacker… Peiter Zatko (Mudge) as its head of security.
- The Lucira COVID-19 All-In-One diagnostic at-home self-test… provides rapid results, and has been approved by the FDA - [for a $50 fee].
- Robinhood… the stock trading platform, is thinking of IPO’ing in Q1 of 2021. The company was most recently valued at $11.7B.
- Two years ago, Amazon acquired PillPack for $1B. This week the Zon launched their online pharmacy, where people can send their prescriptions and order meds. Prime members get free 2-day shipping and savings benefits (up to 80% off generic and 40% off brand-name meds).
- Tesla is reportedly ending… the sale of its cheaper $35K Model 3.
- Elon Musk is now the 3rd richest person in the world... and he takes the spot from a longtime nemesis (at least in his mind), Mark Zuckerberg.
- Jamie Dimon (CEO of JPMorgan Chase) thinks… the most successful leaders have: “humility, openness, fairness and authenticity, and are not just the smartest or the hardest working people in the room.”
- Because of COVID, U.S. children… will miss 9m vaccine doses this year, risking outbreaks of measles, whooping cough, and polio.
- Tesla (TSLA) joined the S&P. Tesla's market value is double Toyota’s, even though Toyota delivered 30X more cars last year.
- Arrival (an EV company)… announced it will list on the NASDAQ via SPAC.
- State and federal investigators are preparing… to bring antitrust charges againstFacebook challenging its acquisition of both Instagram and WhatsApp.
- YouTube will run ads on smaller creators' videos… without giving them any of the ad $’s.
- The original Mad Max (with Mel Gibson) was set in the year 2021.
Crypto-Bytes:
- Citibank (using technical analysis and gold)… published a report predicting that Bitcoin could reach $318,000 by December 2021.
- Crypto merchant bank Galaxy Digital… acquired 2 firms as it positions itself as the “go to” crypto platform for institutional buyers.
- Bitcoin is the Gateway Drug: The first crypto asset most people purchase is Bitcoin. But the “non-Bitcoin” portion of the crypto sector has risen over 270% YTD – where Bitcoin is up just 220%.
- Crypto custodian Anchorage… applied to the Currency Comptroller for a national charter to become the 1st federally regulated crypto-native bank.
- Bitcoin notched 80% gains in the last 6 weeks… and is fast approaching an all-time high of $20,000 set in 2017. Analysts tell us that it has more room to run given its ratio of price to the 200-day moving average.
- Grayscale Investments has broken above $10B… in digital assets under management for the first time.
- Mexican billionaire Ricardo Salinas Pliego… told the world that 10% of his liquid portfolio is now tied up in Bitcoin.
- Mike Novogratz predicts… that the price of bitcoin will hit $65,000.
- Chris Krebs the x-Head of Homeland Security tweeted… “Honored to serve. We did it right. Defend Today, Secure Tomorrow. #Protect2020."
- Bitcoin > Gold: Deutsche Bank analysts said customers increasingly prefer bitcoin over gold as a store-of-value.
- More BTC Put options… are being bought possibly signaling future volatility, a market drawdown, and/or just using them as a non-correlated hedge.
- 24 crypto assets are over $1B in market cap: Sectors of the economy are decentralizing and using blockchain technology. This is a 10 to 20-year trend that is just getting started, and owning crypto assets is the way to play that trend.
Last Week:
Monday: A couple charts I like this morning are: STIM, CPRI, PPSI, and FSR. Unfortunately, PPSI looked great early, but it's already run 24%, so let’s watch for a pullback. We could try CPRI over $30.50, and STIM over $7.70. There's reason to believe that after Friday's and today's romp – we’re overbought. It won't surprise me to see a fade into the close.
Tuesday: I think there might be a play in PLUG today. I may go back into STIM, but not today because it just broke out and needs to "test" that breakout level. RIO looks to be trying to make a move, and I’m in over $63.40. I’ll buy SCCO over $56.15.
Wednesday: Pfizer is saying that their vaccine has a 95% success rate. The FAA has ungrounded the 737 Max, but will anyone fly on it? I’m still watching: NETE, RIO, SCCO, and now OSTK. Today doesn't feel like they're ready for a true sell off, just a pause in an overstretched market. I like OSTK if it gets over yesterday's high of $59.20.
Thursday: The initial jobless claims are worse than hoped at 742K. We're now below 3600 on the S&P. If we don't get that back soon, things could get lumpy. So what do we do here? I’m watching: TDOC > $192.20, OSTK > $60.25, ZM > $420, NVDA > $545, and CRWD > $144.50. Also watching: NIO, CELH, and XPEV
Marijuana… (and a little alcohol)
- Pabst Labs has partnered with e-commerce platform Driven… to offer delivery of its new Pabst Blue Ribbon Cannabis Infused Seltzer to 92% of California's population. Pabst Labs recently launched a 12-ounce, non-alcoholic, lemon-flavored seltzer containing 5mg of THC, 25 calories, and 5gm of sugar.
- Despite COVID, Tequila sales are up 56%… ready-to-drink cocktails are up 131%, seltzers are up over 100%, and non-alcoholic beer is up 41%.
- Bang Energy has terminated its relationship with Pepsi: The move could be a pre-cursor to a new partnership with (perhaps a beer company) that would acquire their assets rather than just distribute them.
- The European Union’s high court said… that CBD derived from the hemp plant is not a narcotic under an international drug treaty, and is therefore subject to the EU law that governs the free movement of goods among member states.
- High-ranking FDA officials said… that the science of CBD and other cannabinoids has become a priority for the agency. [They’ve said this before.] Dr. Amy Abernethy, reiterated the agency’s attention on the growing public interest in CBD and other cannabis-derived products. After six years of virtually unregulated growth, more and more states (like New York) are poised to take matters into their own hands and pass their own CBD regulations.
Next Week: “All Time Highs – Mountain of Liquidity Risk”
Fundamentally Flawed: There is a disconnect between the market and the rest of the world, and it all revolves around Liquidity Risk. This week, the S&P’s sold off slightly, volatility decreased slightly, the bond market rallied, and the dollar did a lot of nothing.
It starts with some basic flaws: Our Treasury mysteriously ended their emergency lending programs to small and medium sized businesses. Couple this with the renewed economic pressures associated with: lockdowns, school closings, and restaurants and gyms being shut down. Throw in the fact that unemployment benefits are running out for 7.5m people on December 26th. And you will get the most recent FED speech high-lighting renewed risks associated with a double-dip recession. Question: With all of these head-winds, how do the markets move higher? Answer: Liquidity Concentration.
Traders are taking Liquidity Concentration to Extreme Levels:
- What is concentrated liquidity? Looking down a 15-year time horizon of the S&Ps, we see trading volumes (liquidity) constantly declining. But the liquidity that I’m concerned about is inside the options market – because it’s the options market that is currently telling the stock market where to go.
- What are the effects of concentrated liquidity? Everybody is driving capital into a handful of products, and by driving capital into the ‘RIGHT’ products – you can move markets.
- For example, on Friday Tesla traded roughly 1m options contracts and 33m shares. 1 option contract is the equivalent of 100 shares … so those 1m option contracts can suddenly equate to 100m shares traded. But it’s a little more complicated than that.
- How does buying options – move the stock price?
o When you buy a $500 Call option in Tesla, you believe that (and will make money when) the price of Tesla increases.
o The firm that SOLD you those $500 Tesla Calls (the market maker), charged you a fee for doing so, and needs to balance out its risk (in case Tesla really does rise).
o So, to balance out its risk – the market maker goes out and ‘buys’ Tesla shares. And as Tesla moves higher or lower, the market maker will dynamically hedge their risk by buying and selling Tesla shares to help balance all of those option contracts.
o Therefore, the retail trader who purchased those Tesla Call options, caused the market maker (who Sold the Calls) to consequently buy Tesla stock to hedge their risk.
o Now, because they just ‘bought’ Tesla stock, the price of Tesla will move higher.
o Retail traders are beginning to get behind a concentrated number of leveraged products that are moving markets. Beware, the same way this works to the upside, it can also work to the downside … ONLY FASTER!
- Why does this matter?
o 37m TOTAL option contracts were traded on Friday.
o Tesla traded 1m of those. So, Tesla traded 1/37th of ALL of the option contract volume on Friday. With 1 option = 100 shares, one small company Tesla can begin to move an entire market.
o Apple also traded 1m options contracts on Friday. But Tesla is a $500 stock, and Apple is a $115 stock.
o So, Tesla traded a lot more total dollar volume than Apple, and consequently had a larger impact on the market than even Apple.
- How does EFT trading impact the market?
o On Friday, the top 5 ETF’s traded 6.4m option contracts = 1/6th of the total option volume.
o By including some other index options, we quickly get to 12.5m contracts traded (1/3rd of all contracts) – and that includes the SPX which is a $3,500 product (roughly 20X the price of any average stock).
o We’re concentrating liquidity into a handful of products that can easily be manipulated by the retail trader using a leveraged product such as OPTIONS.
- Rock the boat:
o Between the SPX and the SPY, you have 5m of those total 37m traded contracts.
o The 9 elements that moved this market on Friday were: SPX, SPY, QQQ, IWM, HYG, AAPL, TSLA, Nio, and Baba.
o That’s it - know the list: SPX, SPY, QQQ, IWM, HYG, AAPL, TSLA, Nio, and Baba – because the top 7 aren’t changing any time soon.
- Retail traders are driving this market – with the professionals reacting:
o What if retail changes and starts buying Puts. That will drive the entire market lower in a hurry.
o Right now, the CART is leading the HORSE, and increased volatility is right around the corner.
Tips:
HODL’s: (Hold On for Dear Life) / (All %’s = YTD)
- CTI BioPharma (CTIC = $3.71),
o Selling Dec. $4 covered calls for income…
- EXK Gold (EXK = $3.46 / in @ $1.53 = up 126%),
o Selling Dec. $4 covered calls
- GBTC Bitcoin (GBTC = $21.24 / in @ $9.41 = up 125%),
- Hecla Mining (HL = $5.15 / in @ $2.36 = up 118%),
o Selling Dec. $5 covered calls
- New Gold (NGD = $1.82 / in @ $0.82 = up 122%),
o Selling Dec. $2 covered calls
- Pan American Silver (PAAS = $30.80 / in @ $13.07 = up 135%),
o Selling Dec. $34 covered calls
- Hyliion (HYLN = $25.10 / in @ $0.32 = 7,744%).
Crypto:
- Bitcoin (BTC = $18,700),
- Ethereum (ETH = $510),
- Bitcoin Cash (BCH = $260)
Thoughts: Here’s a trading strategy that I’ve been using for a least 10 months. I sell a covered call that’s in the money, with the sole DESIRE of getting called out. The strategy is working with either weekly or monthly options, takes advantage of $0 transaction fees, and is strictly for income/trading purposes. For example, with the market in an uptrend, stocks like ZM and NVDA command monster premiums. So, instead of buying them – sell them. On Tuesday, ZM was trading at $402. The weekly $390 call options (expiring in 72 hours) were $20. The strategy is to buy the shares, and sell the in-the-money ($390) call options for $20. The strike price is already $12 in the money, so probabilities are on my side that ZM won’t fall under that. If ZM stays above $390 by Friday night, I will be called away, and they will take ZM away from me at $390 per share – leaving me to pocket the $8 difference. I generally wait until Wednesday to book the trade – just to be sure that the stock is going to get called away and not fall below my strike. But even on less volatile stocks, with just 1 day to expiration, I’ve been able to consistently use this strategy and pocket real money.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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