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Tuesday, June 18, 2024

Testy Tuesday – Dropping Below the Lines

Wheeeee – that was fun! 

It only took a day to wipe out the rest of October's gains but we recovered a bit off the weak bounce line (of the 15% line) but that was sure to lend support so now we calculate the bounce lines off the bounce line and we fall from 3,562.50 (the 25% line) to 3,360 (the weak bounce line) and let's call that an even 200 points which makes the bounces 20% of that so 3,400 on the dot is the short-term weak bounce and 3,440 is the strong bounce but 3,410 is the 400-Hour (2 month) Moving Average on this short-term chart and that's about a month – so we'll have to respect that line followed by our 20% line at 3,420 – that's going to make it a tough slog to get back through that zone of resistance.  

Keep in mind TA is totally BS, our 5% Rule™ is not TA – it's just math.  Math that is derived from the same formulas that drive the electronic trading that is 90% of all trading these days – so it works very well.  If you want to apply TA you shouldn't look at a chart's past but consider it's future.  We're significantly below the 100-hour (2-week) moving average and, since it's a fast-moving average, it's going to get pulled down quickly and that's going to turn that blue support line into a downtrending line of resistance and, since we are as much below it as we were above it at the moment – then we can imagine the downslope will match the upslope but, for that to happen, we'd have to be having days below the 15% line again so – if we can't pop back over that red 400-hour moving average this week, which also "happens" to be our 20% line heading into the election, then DOOM!!!! is a ahead for the market.  

Of course DOOM!!!! is a relative term as we're miles up from the bottom but not far off the 3,200 we started the year at.  Earnings season has not been kind so far, as we've fallen almost 10% from our too highs since companies began reporting in earest and it hasn't been the data – as we haven't had too much of it – it's the earnings – and the virus.  See, I'm already bored warning you about the virus and I've moved on…

One stock that reported yesterday that caught my eye was Pet Med Express (PETS) the on-line pharmacy for dogs and cats.  With people sitting home all day with their animal friends, they tend to pay more attention to them when they are sick and spend more money on them and earnings were a huge beat but, because the market sucked – they got sold off anyway.  

While not terribly sexy at 19x earnings, PETS is significantly cheap compared to the 30x average in the On-Line Retail space and has been growing a lovely 8% a year for the last 5 years and that's doubled in the past year AND they pay a nice $1.12 (3.83%) dividend.  That makes them a great candidate for our Dividend Portfolio and here's what we'll do:

  • Buy 1,000 shares of PETS at $29.23 ($29,230)
  • Sell 10 2023 PETS $22.50 puts for $6.60 ($6,600) 
  • Sell 10 2023 PETS $30 calls for $9 ($9,000) 

By selling the puts, we're promising to double down at net $15.90 and that's a price we'd LOVE to own PETS at so it's a very good use of $1,516 in ordinary margin.  We're only laying out $13,630, which is $13.63/share and, if we are assigned 1,000 more at $22.50 ($22,500), then we'd be in 2,000 shares for $36,130 or $18.065/share, which is 38% below the current price.  That's our WORST case!

On the upside, if PETS can struggle back over $30 in the next two years, we'll get $30,000 back for a net profit of $16,370 (120%) PLUS we get $2,240 in dividends for another 16.4% of our cash outlay while we wait.   Aren't options fun?

In our Earnings Portfolio, we can take advantage of the high VIX and the volatile stock to do the following:

  • Sell 10 PETS 2023 $25 puts for $9 ($9,000) 
  • Buy 20 PETS 2023 $25 calls at $10.62 ($21,240)
  • Sell 20 PETS 2023 $35 calls for $7.50 ($15,000) 

We get PAID to take this spread as our net is a credit of $2,760 which means, even if we are assigned at $25, our net cost would be just $22.40 per share, which is a better entry than our dividend portfolio in their first round.  That's our WORST case – owning 1,000 shares of PETS at $22.40 ($22,400), which is 23.3% below the current price.  If all goes well, however, we'll make $20,000 on the spread plus the $2,760 in our pocket so $22,760 (824%) upside potential on this one.  

Most people consider optons a less conservative way to play but our upside at $30 is $12,760, not much less than our Dividend play – yet we're using no cash (a credit, in fact) and about the same margin yet our assignment risk is 50% lower.  So this is 1/2 of that position (potentially) making $12,760 at the same strike ($30) the dividend play makes $18,620 so about 66% of the profit at the same $30 but with the upside potential of $22,760, which is over 20% more and still 1/2 the risk and 1/2 the allocation – that leves us open to more diversification.  

As I mentioned, I'm bored warning people about the virus, the Global Economy and such so here's the headlines of the moment:



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