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The Week Ahead – 3,350 is Critical for the S&P 500

A death cross!

A death cross is, according to Investopedia:

The death cross is a technical chart pattern indicating the potential for a major selloff. The death cross appears on a chart when a stock’s short-term moving average crosses below its long-term moving average 

And it looks like THIS!  That blue line is the 50-hour (1 week) moving average moving below the 200-hour (1 month) moving average and now we're going to test that range from below and, if 3,333 (the 50-hour) acts as strong resistance, it's a very bearish signal moving forward.  The 200-hour moving average (3,350) will certainly be rejected at first (great shorting opportunity on /ES with tight stops over that line) and then we'll see if we get a strong or weak retracement from there but – if we don't even make it back to 3,350 – well that's also the 50-day moving average on the S&P 500 and failing that means, as we discussed last week, that we're very likely heading back to 3,100 – a 2.5% drop from here and the 200-day moving average.  

The Futures have us up to 3,330 this morning and I will want to short that 3,333 line but with very tight stops but I don't see any really good reason for the Futures to be up 350 points on the Dow (1.3%) and 35 on the S&P (1%) other than it's another BS, manipulated, low-volume rally to start the week off so the Big Boys can sell to all the suckers as they liquidate ahead of the reckoning.  

The US reported 36,919 new cases of corona virus yesterday but "only" 1,000 people a day are dying so why not open everything back up?  Florida's idiot Governor DeSantis took his lips off Donald Trump's ass long enough to issue an order lifting ALL restrictions on businesses so come on down to Florida and get a lap dance folks!  

"Every business has the right to operate," DeSantis said. "Some of the locals can do reasonable regulations. But you can't just say no."

DeSantis also said his order would stop cities and counties from fining people for not wearing mandated face coverings. He said fines and other penalties imposed so far would be suspended.  There are no restrictions on the number of people who can attend outdoor sporting events in Florida, according to the governor, who added the state hopes to host what he called "a full Super Bowl" in Tampa in February.  And if the NFL has issues with insurance costs and potential liability, DeSantis said that "maybe we'll address that after the election here in Florida with the new Legislature."

Carolina Panthers v Tampa Bay BuccaneersIsn't Florida amazing?!?

What's really great about this "Super Spreader Bowl" idea is that Tampa Bay Stadium ACTUALLY has a skull and crossbones logo in each corner of the field – it's like they are already planning the scenes from the movie that document how America doomed itself through political incompetence and, in four short years, went from being a vibrant, prosperous nation to a country dominated by Depression and disease.  Trump 2020!  

India is joining the US in the 6M cases club though America has crossed 7M cases but we have less than 1/4 of India's population (1.35Bn) so we're still the GREATEST at getting infected.  We are going to have to keep shutting down those virus restrictions though if we want to keep ahead of Brazil (population 210M) who are already at 4.7M cases, number 3 in the world.  

If Biden is elected, and even if he isn't, we can expect a big push to get a vaccine ready and the leading contenders for that are, at the moment, Pfizer (PFE), AstraZeneca (AZN) and Moderna (MRNA) and MRNA is a newer company that has never made any money and has a $27Bn market cap while AZN has a $143Bn market cap and makes about $2Bn a year – so still expensive at 70x earnings but PFE made $16Bn last year and you can buy that whole company for $200Bn at $36 per share so just 12.5 times earnings.

While Pfizer may not ultimately "win" the vaccine race, they are a solid blue-chip pharmacuetical company who are clearly able to keep up with the BioTechs WHILE making a healthy profit.  Isn't that the kind of company we like to invest in?

PFE pays a very nice $1.52 dividend (4.22%) so it's worth considering an ownership play.  Here's one for an example:  Let's say we were willing to own 36,000 worth of PFE at $36, so 1,000 shares.  $36 is not a great price, we're up in the channel but it's a reasonable price.  Rather than buying 1,000 shares for $36,000, we can instead buy 500 shares for $18,000 and PROMISE to buy 500  more for $33 in January of 2023 by selling the 2023 $33 puts for $5.50.  

Since the put buyer is paying us now in exchange for our promise to buy PFE from them in 2023 (they may wish to set a floor on their stock), we collect $5.50 now and our net entry, if assigned, would be $27.50 – a 16.67% discount to the current price on our next 500 shares. 

Covered Call Option Strategy Explained | The Options BroMeanwhile, we can also protect ourselves by selling a call option.  Selling a call obligates us to turn over our stock to the call-holder at a set price.  We can sell the 2023 $35 call for $5.30 and that's interesting as it's net $40.30 and we're buying the stock for $36, less the $5.50 for the short puts and less the $5.30 for the short calls so our net entry is just $25.20 and getting called away at $35 would be a $9.80 (38.88%) profit PLUS we're going to collect 1.52 in dividends each year, which is now 6% of our adjusted net entry! 

So we make 6% interest while waiting 2.25 years to make 38% so call it 50% anticipated profits overall if PFE can manage to hold $35, which is even lower than it is now.  Aren't options fun?  Since our net outlay is just 500 shares x $25.20 = $12,600, if we are assigned another 500 shares at $33 ($16,500), our total cost for 1,000 shares would be $29,100 so our WORST CASE is owning 1,000 shares of PFE for $29.10 per share, a $6.90 (19%) discount to the current price NOT including what we collect in dividends!  

To summarize that play for our Newsletter Portfolio, it's:

  • Buy 500 shares of PFE for $36 ($18,000) 
  • Sell 5 PFE 2023 $35 calls for $5.30 ($2,650) 
  • Sell 5 PFE 2023 $33 puts for $5.50 ($2,750) 

That's net $12,600 out of pocket and, if called away at $35 ($17,500) we make $4,900 (39%) against the cash outlay but we will be charged margin against the short puts – it's not a free lunch.  The dividends of $1.52 (0.38 per quarter) will pay us $190 per quarter while we wait, which is 1.5% PER QUARTER – way better than the bank!

A more aggressive way to play, by comparison, is to do what we call an Artificial Buy/Write where we don't actually own the stock.  Since we are WILLING to own 500 to 1,000 shares at net $29 – selling the 2023 $35 puts for $6.60 is free money since it nets us in for $28.40.  So we can be aggressive and sell 5 of those puts for $3,300 and use that money to buy 15 of the 2023 $30 calls for $8 and sell 15 of the 2023 $37 calls for $4.60 for net $3.40 ($5,100). 

Why 15 and not 10, which would be net $100?  Because it is my intent to sell short calls over time to create an income stream that will, hopefully, exceed the dividend flow from the other trade.  It will be fun to compare the two's performance over time so we'll put them both in the portfolio and see which one performs best:

  • Sell 5 PFE 2023 $35 puts for $6.60 ($3,300)
  • Buy 15 PFE 2023 $30 calls for $8 ($12,000) 
  • Sell 15 PFE 2023 $37 calls for $4.60 ($6,900) 

That's net $1,800 on the $10,500 spread so our upside potential is $8,700 (483%), which is substantially more than we expect to make on the straight stock play and our risk is owning 500 shares of PFE for $35 ($17,500) plus the $1,800 we're laying out (assuming we're wiped out on our longs), which would be net $38.60 – a bit higher than the current price.  

On the calendar this week, we have Non-Farm Payrolls on Friday so not  much else matters.  For some reason, the NY Fed's John Williams is speaking 3 times in 3 days and Williams is very doveish and willing to let inflation run wild so he's good for the markets.  Other than that, we've got Retail Sales and Housing on Tuesday, a revised Q2 GDP estimate on Wednesday along with Chicago PMI and Investor Confidence.  PMI, ISM, Personal Income and Outlays make for a big Thursday and Factory Orders, Non-Farm Payroll and Consumer Sentiment finish off a big data week.

We'll see what sticks from this morning's rally but Monday's are basically meaningless – just another chance to short the high-flyers, I think.

Have a great week,

- Phil

 


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  1. Good Morning.



  2. Apparently, having issues displaying pictures!


  3. If you click and open in a new tab, it displays fine.


  4. What are your thoughts about T down here???

    What about Jan 22 25/30 BCS??


  5. good morning


  6. Phil/brkb, interesting discussion in the weekly. is there a new trade opportunity now?


  7. Phil/morning commentary

    " if Florida's idiot governor took his lips off Trump's ass long enough……"

    Truly an award winning phrase! You out do yourself sometimes!

    Love it!

    The political circus in the US is so nostalgic for me in that it brings back scary memories of growing up in African countries in the 70's and 80's. And look where those countries are…We appear to be on the same slippery road…


  8. Florida Gov – One of my fave's….. :)

    https://www.youtube.com/watch?v=z1YP_zZJFXs


  9. Good morning!

    We blew over 3,333 but that will make it a better short on the way back down – if we do go back down.  Russell if flying at the 2.5% line (1,505) so we'll see how that goes.

    Let's add PFE officially to the LTP as it's a solid entry:

    • Sell 15 PFE 2023 $35 puts for $6.60 ($9,900)
    • Buy 50 PFE 2023 $30 calls for $8 ($40,000) 
    • Sell 50 PFE 2023 $37 calls for $4.60 ($23,000) 

    That's net $8,000 on the $35,000 spread so our upside potential is $27,000 (337%) and our worst-case scenario is owning 5,000 shares at $35, which I doubt will be a bad thing. 

    We will, of course, sell some short calls, like 10 Nov $37 calls at $1.45 would use up 53 of our 844 days so not even 10% and if we collect $1,450 10 times, that's $14,500, adding 50% to our potential profits – but we'll only sell when we feel PFE is toppy – and it isn't at the moment.

    On the Big Chart, watch the NYSE and the 200 dma at 12,372 – safe for now at 12,686 on today's 200-point pop.  Otherwise, we'll see if we can get back over and hold those 50 dma lines but all are being death-crossed by the 20 dmas – there's no stopping that from happening. 

    T/Millard – We love T when it's cheap and $28 is cheap.   T is already in the LTP and the same position is still good (because it's cheaper now):

    T Long Call 2022 21-JAN 28.00 CALL [T @ $28.04 $0.00] 75 9/3/2020 (480) $25,500 $3.40 $-1.06 $3.40     $2.34 $0.00 $-7,950 -31.2% $17,550
    T Short Call 2022 21-JAN 33.00 CALL [T @ $28.04 $0.00] -75 9/3/2020 (480) $-10,500 $1.40 $-0.54     $0.87 $0.00 $4,013 38.2% $-6,488
    T Short Put 2022 21-JAN 28.00 PUT [T @ $28.04 $0.00] -25 9/3/2020 (480) $-8,125 $3.25 $0.50     $3.75 $0.00 $-1,250 -15.4% $-9,375

    BRK.B/Stuart – It's mostly a proxy for the S&P but without the bad apples so I like them as a tool that way but, like the S&P, it's a bit expensive now.  

    Also with BRK/B – don't forget Buffett will retire or die at some point and you could get a very sudden 20% hit to your stock.  THAT is when I will buy it.

    Warren Edward Buffett



    August 30, 1930 (age 90)

    Slippery is right Maya.  

    The information's unavailable

    To the mortal man

    We work our jobs

    Collect our pay

    Believe we're gliding down the highway

    When in fact we're slip slidin' away

    LOL 1020.  Is that pro or anti DeSantis?  Hard to tell….


  10. Well, you can see why I'd rather be neutral than bullish or bearish.

    LTP $982,958, STP $460,952 = $1,443,910, that's back up from $1.2M last week, mostly because TSLA calmed down, which we assumed would happen.  That's the beauty of the STP hedges, we can make huge money if the market rallies but the most over-priced stock in history does not.  

    Remember, our target is simply to be below $380 in Jan or we just roll it along.  $380 is still the bottom of the channel but, if we spend more time above that line, the channel keeps rising and our bet becomes less realistic and we'll have adjust again but we'll also collect $67,425 from the short puts (10% of the short longs) to make that adjustment with.  

    TSLA Short Call 2021 15-JAN 380.00 CALL [TSLA @ $418.71 $11.37] -70 8/20/2020 (109) $-581,980 $83.14 $11.99 $-94.82     $95.13 $8.88 $-83,895 -14.4% $-665,875
    TSLA Long Put 2021 15-JAN 190.00 PUT [TSLA @ $418.71 $11.37] 25 6/19/2020 (109) $85,350 $34.14 $-30.17     $3.98 $-1.09 $-75,413 -88.4% $9,938
    TSLA Short Put 2021 15-JAN 300.00 PUT [TSLA @ $418.71 $11.37] -30 8/21/2020 (109) $-78,900 $26.30 $-3.83     $22.48 $-3.53 $11,475 14.5% $-67,425

    At $421 the short calls are more than 50% premium so $350,000 of the -$665,000 will burn off in 109 days either way and TSLA would have to be at $475+ to hold $95 on the short calls.  The March $420s are $95 but we also have $10 from the short puts to work with (if TSLA is up, of course) and that's the March $480 calls for $75 but, of course, we can sell more short puts, like the March $280 puts for $25 and that gives us $12 more to roll up with and the March $530 puts are $63.

    So, when I look at the short Jan $380 puts at $95 and decide if I'm worried about them with TSLA at $420, the real question is – do I think TSLA will be over $530 in March?  That's 20% up from here and the answer is no so I don't really care what the Jan $380s are doing day to day….


  11. Cleveland-Cliffs to buy U.S. assets of ArcelorMittal




  12. Fact-checking Trump’s recent claims on health care, the Supreme Court and more



  13. Temperatures will tumble in the East this week as the West bakes in record heat




  14. Brussels imposes curfew on bars as coronavirus cases soar


  15. Judge Halts Trump Administration TikTok Download Ban




  16. Only Little People Pay Taxes


  17. Things held up well all day, pretty strong opening statement for a Monday.


  18. This could put pressure on the Apple model. Pretty smart of Google:

    https://www.engadget.com/android-12-google-play-194125627.html

    When Google releases Android 12 sometime next year, the company says it will make it easier for Android users to install new software through third-party app stores on their devices. Google said it's making the change in response to developer feedback, and promised to release more details in the future. [...]

    The policy clarification almost certainly comes in response to Fortnite's recent removal from the Play Store. In August, Epic Games added an alternate billing system to the iOS and Android versions of the game that allowed players to bypass the App Store and Google Play when paying for Fortnite's in-game V-Bucks currency. In fact, Google explicitly mentions Fortnite when talking about the openness of the Play Store, saying, "even if a developer and Google do not agree on business terms the developer can still distribute on the Android platform."


  19. AH-

    i just had the sudden realization that I am a 'loser and a sucker', not just an average one either.

    For one, I have been paying taxes every year since I arrived in this country. LOSER AND SUCKER!

    I also happened to serve in the military- LOSER AND SUCKER! I did not die serving my country, so, slightly less of a sucker since I am still alive.

    I gave my services for free to people who were sick and needed me- for years! LOSER AND SUCKER!

    According to trump, I probably should have committed suicide by now, being a sucker so many times over! Either that, or I gotta get 'smart' and at least stop paying any taxes!


  20. Well, Maya, you are also a loser for actually making money! Only winners lose millions and stiff creditors and the taxpayers with the bill!

    I really don't envy you now!

    Of course, I am big loser and a sucker as well! But not as much as you since I didn't serve.


  21. What's amazing is Trump voters on TV now (saw a couple) saying that they don't care that he doesn't pay taxes because he reduces their own taxes. These guys are getting $100 in tax cut (if anything) and they don't care that their guy stiffs the government of 100's of millions which they will have to make up for eventually. Ignorance is just so depressing.


  22. Depressing/StJ – Very.  Sleepy Joe should call Trump President Ponzi tonight.