Bulls Step Up… and Reviewing Recent Positions

• The market turns green for the week as tech rallies
• Review four recent trades
• My strategy for trading in an uncertain environment

For a while this week – it looked as though it was going to be four straight bearish weeks for the S&P 500 and Dow Jones.

However, today the bulls stepped up to the plate. Or more accurately – big tech stepped up! 

As prices touched a low of 3209 on the S&P 500 – the index came within ~1.6% of the 35-week EMA (3158) 

And surprise surprise – it was big tech which carried the market.

What else?

For example, Amazon rose 2.5% and Facebook gained 2.1%.

Apple advanced 3.8% (more on Apple shortly); and Microsoft climbed 2.3%. Overall, the tech sector jumped 2.4% and for its best day since Sept. 9. 

And this makes sense…  as much of September’s losses have been concentrated with this sector.

For example, Apple has falled ~13% this month. Microsoft, Alphabet, Netflix, Amazon and Facebook are all down at least 7.9% over that time period. 

S&P 500 – Sept 25 2020

As readers know – I expect the zone of 3000 to 3100 to act as strong support for the market. 

However, 3209 might be the near-term low? It’s impossible to know. 

What troubles me (technically) is two-fold

(a) the failing momentum on the weekly-MACD with strong negative divergence; and
(b) the false break of the February high. 

In my experience – this looks like a setup for lower prices. 

Reviewing Recent Positions

Over the past two months or so – I offered readers at least four different trading ideas: 

1/ Hilton – July 15 – “Why There’s Pain Ahead for Major City Hotels“
2/ Alibaba – Aug 07 – “A New Trade from a Coming Cold War w/China“
3/ Intel – Aug 14 – “A New Trade on an Old Tech Name“
4/ Apple – Sep 08 – “Tech Has More Room to Fall…”

These trades are incremental to warning readers about the potential for a 10% correction in the broader market last month – and for us to expect gold and silver prices to ease. 

But what I wanted to do is check in with each of these trades specifically (as I said I would). 

Are they profitable or did I get it all wrong?

1. Hilton

My thesis here was city-based hotels – largely dependent on corporate travel – struggling with high fixed costs and sagging demand – were in trouble due to COVID.

And whilst Hilton had rallied sharply from its lows – the enthusiasm for a v-shaped recovery in the hotel sector looked overdone. 

I was looking at selling the $95 Oct 16 Call  (which at the time had 93 days to expiry). The contract sold for $3.15 giving me a yield of above 16%. 

In other words, I expect Hilton to stay below $95 by the time of expiry. 

Well after I placed the trade Hilton fell… found support and rallied a bit further (which I expected).. and then found resistance.

And with only 14 trading days remaining before this trade expires – the contract is trading for $0.63

In other words, we could close out this trade by buying back the position for $0.63 – giving us a nice profit. However I am willing to let this trade play out and pocket the entire $3.15 in premium. 

Hilton will need to rally at least 14% (ie to $98.15) over the next 14 trading days for this trade to lose money. Note – the break-even price is the strike price ($95) plus the option premium received ($3.15)

Probabilities are I will make 16% annualized on the trade for the capital I put up as risk. 

2. Alibaba

Whilst I had a bearish bias wit Hilton – that was not the case with Alibaba.

With BABA I was bullish. 

With this trade – I sold BABA Oct 16 $215 Puts for a premium of $5.40 – risking my capital for 72 days. 

Here I was looking to make an ~13% annualized return (i.e. (($5.40 / $215) x 365) / 72 = 12.7%)

Well not long after I placed the trade – BABA rallied strongly. 

My thesis was the market was over-reacting to Trump’s TikTok and WeChat bans – which had nothing to do with BABA. 

Today that contract is trading for just $0.36

Again I will simply let these contracts expire worthless over the next 14 trading days and make ~13% on the capital I put at risk. 

3. Intel 

Similar to BABA – I was bullish on the outlook for Intel. 

And whilst I didn’t think Intel was going to “knock the lights out” with some kind of 20+ rally in the near-term – I thought the market had over-reacted (to the downside) on its latest result. 

Cash flow was still very strong and revenue growth was there. However, they did mismanage the delivery of their latest 7nm chip – gifting consumer market share to AMD. 

I decided to sell the Oct 16th $42.50 strike puts for 76c.

The trade had 66 days to its expiry and offered me a ~10% annualized return; ie ((0.76 / $42.50) * 365) / 66 = 9.9% annualized)

Well today that contract trades for just $0.09. 

Again, I will simply let these expire worthless and bank the annualized 10% return on my capital. 

4. Apple

For some reason, my trade on Apple received the most attention (and questions) from readers. 

I guess that makes sense – it is one of the most traded stocks in the world. 

Now at the time – Apple was trading around $120 – and well off its highs.

And whilst I felt that Apple could fall further – I was happy selling Nov 20 $80 Puts for $1.15

My yield on this trade wasn’t ideal – just under 8% annualized – my I was not willing to pay more than $80 for Apple’s stock. 

As it happened – Apple did drop after I placed the trade – with the Put option contract jumping to around $1.50 (i.e., much higher than the $1.15 I sold it for)

Obviously I wished I could have got $1.50 when I sold it – but I don’t pretend to get the timing right every time. And that’s ok. 

Today Apple is closed the week at $112.28 – down around $8 from when I sold the put option. 

But what do we see with the put options I sold? 

You would think that put option would be much higher right (given the stock was down sharply and closer to the $80 strike price) 

Wrong.

Today they are trading for just $0.73 – a long way below the $1.15 I sold them for – as volatility comes out of the stock. 

Good news! 

For those less familiar – option premiums are high when volatility is high. 

I am happy to keep this position on – as I would ideally like to buy Apple for $80 if the opportunity presents over the next two months.

And if it doesn’t – then I will simply keep the option premium (like the other three trades).

Putting it All Together

In this case, it turns out we will be “four from four” with these trades. 

I have placed three other trades which are also going well – but these were not posted to the blog (there’s only so much time in the week to write)

The idea behind these trades is three-fold: 

• These are generally stocks I want to own (or be short) at a specific price; 
• In most cases, I’m looking to make at least 10% annualized return on my risk capital; and
• I never risk more than 20% of my total capital on any one trade