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Saturday, April 20, 2024

Record-High Wednesday – Dow 33,600, S&P 4,140, Nasdaq 14,000

Bank earnings are good.  

Well, Goldman Sachs (GS) and JP Morgan (JPM) are good, Wells Farge (WFC) – not so much.  And I'm not sure I'd call JPM "good" as $5.2Bn of the quarter's $14.3Bn in profit came from the release of loan reserves that were set aside last year to cover anticipated loan defaults.  Since the Federal Government threw $6Tn at the economy since then – it turns out they didn't need the $5.2Bn to cover bad loans so now the money (which was always in the bank) is moved to the income side of the ledger.

I have always objected to Loan Loss Reserve accounting because it allows a bank (and many other companies) to take profits that have already been declared (and already moved the stock) out of Cash (showing a loss on demand for taxes, housecleaning, etc.) and then back to profits when they feel like it (to boost the stock price or save a quarter).  Especially for Businesses that are able to buy back their own stock when the price is depressed due to a loss they purposely caused and then, when they want to sell more stock or take bonuses – they simply re-recognize the earnings on demand.  What a scam!

So what we have at JPM is a huge "beat" as profits were projected to be $3.10 per $154 share for the quarter and now it's $4.50 – almost 50% higher than projected.   Even if we assume the bank goes back to "normal" $8Bn quarters, we're still looking at a $40Bn year and you can buy the whole bank for $473Bn – not bad.  We already have Goldman Sachs (GS) in our Long-Term Portfolio (LTP) so we're not going to add JPM and GS also knocked it out of the park.  We were worried about JPM because they have ordinary banking (chase) and we didn't count on those stimulus checks to generate so much business but they did – mainly because the Government wired the money to your bank and didn't just send you a check to spend.  We were far too conservative with GS when we made it a Top Trade Idea for our Members on October 14th:

There's been some spillover from Main Street to Wall Street as Bank of America's (BAC) profits are down 16% in today's report and Wells Fargo's (WFC) are down 56% but Goldman Sachs' profits almost doubled expectation at $9.68 per $215 share in a single quarter – very impressive.  We don't have much banking in the LTP and GS is a good one (well, evil, but good earnings) so let's add them with the following trade:

  • Sell 5 GS 2023 $165 puts for $20 ($10,000) 
  • Buy 10 GS 2023 $170 calls for $60 ($60,000)
  • Sell 10 GS 2023 $210 calls for $40 ($40,000) 

That's net $10,000 on the $40,000 spread that's 100% in the money to start and all GS has to do is not be lower than it is today in 2.25 years and we make $30,000 (300%) – aren't options fun?  Our worst-case scenario is owning 500 shares at net $185, 15% lower than the current price and the ordinary margin requirement is just $5,718 – so it's a very margin-efficient way to make $30,000 too!

As of yesterday's close, GS was at $327 – miles above our target and, in our LTP, the spread is already at net  $30,125 for a $20,125 (201%) profit so far, but it is a $40,000 spread so $9,875 (32.7%) left to gain in the next 20 months makes it hard to get rid of at 1.7% per month return on our money.  It certainly doesn't seem likely we will not collect the full $40,00 as GS would have to drop over $117 so we're kind of "stuck with" this now-boring trade in our LTP.

GS Long Call 2023 20-JAN 170.00 CALL [GS @ $327.68 $0.00] 10 10/15/2020 (646) $60,000 $60.00 $98.75 $60.00     $158.75 $0.00 $98,750 164.6% $158,750
GS Short Call 2023 20-JAN 210.00 CALL [GS @ $327.68 $0.00] -10 10/14/2020 (646) $-40,000 $40.00 $84.38     $124.38 $0.00 $-84,375 -210.9% $-124,375
GS Short Put 2023 20-JAN 165.00 PUT [GS @ $327.68 $0.00] -10 10/14/2020 (646) $-21,000 $21.00 $-16.75     $4.25 $0.00 $16,750 79.8% $-4,250

Investing should be boring if you are doing it correctly so I'm not ashamed to make 1.7% per month while we wait for our GS position to fully mature.  What we will be doing though, is looking for bargains in the banking sector but it won't be WFC, who cheated their own customers (but, somehow, still have customers).  TD Bank (TD) is pretty good but they don't have long-term options, so not too much fun to play.  We just added an aggressive play on Lloyd's (LYG) last month, also in our LTP and it hasn't taken off yet.  Earnings are tomorrow:

LYG Long Call 2021 15-OCT 2.00 CALL [LYG @ $2.38 $0.00] 50 3/9/2021 (184) $2,250 $0.45 $-0.03 $0.45     $0.43 $0.00 $-125 -5.6% $2,125
LYG Short Put 2021 15-OCT 3.00 PUT [LYG @ $2.38 $0.00] -50 3/10/2021 (184) $-4,500 $0.90 $-0.15     $0.75 $0.00 $750 16.7% $-3,750

That wasn't our Top Trade that day – our Top Trade was Pfizer (PFE) or, what I like to call THE MOST OBVIOUS TRADE EVER MADE:

…That's why Pfizer (PFE) is still a bargain at $34.35 – the WHOLE WORLD needs to be vaccinated, not just the US.  And we'll probably need to be re-vaccinated next year too.  Yes, JNJ and MRNA are good too but it's PFE that's stupidly cheap at $34.35, which is a market cap of $191.5Bn for a company that made $16Bn in 2019 and $9.6Bn last year and projects $18Bn in earnings this year – and that doesn't even take into account the massive vaccine sales that are still a wild card.  

We already have a play on PFE in our Long-Term Portfolio and, frankly, it's not doing well so far:

PFE Long Call 2023 20-JAN 30.00 CALL [PFE @ $34.35 $-0.04] 50 9/28/2020 (682) $40,000 $8.00 $-1.95 $8.00     $6.05 $0.38 $-9,750 -24.4% $30,250
PFE Short Call 2023 20-JAN 37.00 CALL [PFE @ $34.35 $-0.04] -50 9/28/2020 (682) $-23,000 $4.60 $-1.25     $3.35 $0.37 $6,250 27.2% $-16,750
PFE Short Put 2022 16-SEP 35.00 PUT [PFE @ $34.35 $-0.04] -15 9/28/2020 (556) $-9,900 $6.60 $-0.85     $5.75 $1,275 12.9% $-8,625

We invested net $7,100 in that $35,000 spread and we're down $2,225 but that means, as a new trade, it's only net $4,875 for the $35,000 spead with $31,125 (638%) upside potential if PFE can get back to $37 by 2023 and the worst case is you end up owning 1,500 shares at $35 ($52,500) plust the $4,875 invested comes out to about $38/share but those are only Sepember puts and they are now $5.75 and mostly premium and the 2023 $33 puts are $4.50 so we'd lower our basis by rolling them if we have to.   The margin on the short puts is just $5,379, so it's a very efficient way to make $31,125.  

We have a similar spread in our Money Talk Portfolio and, like the LTP, we're going to leave it alone for now but, in our Dividends Portfolio, we don't have PFE – even though they pay a nice $1.56 (4.54%) dividend – and we know how to enhance that with a simple options strategy.  So, for the Dividend Portfolio, let's add:  

  • Buy 1,000 Shares of PFE for $34.35 ($34,500) 
  • Sell 10 PFE 2023 $30 calls for $6 ($6,000)
  • Sell 10 PFE 2023 $33 puts for $4.50 ($4,500) 

That drops our net entry to $24,000 or just $24 per share.  If we are assigned 1,000 more at $33, our average cost per share would be $28.50, still 17% below the current price.  That makes the $1,560 dividend we expect to collect a very nice 6.5% dividend while we wait to be called away with a $6,000 (25% profit) but, of course, we intend to roll our short puts and calls and keep the stock for the long run.  

It's not very sexy with "just" an anticipated return of $9,120 (38%) against our $24,000 investment in two years but, if PFE is safely over $37 early next year, we can then release the allocation block for another trade.  That's why, even with conservative targets like these, our Dividend Portfolio is up 70.2% since Oct 25, 2019.  As we discussed in last week's Live Trading Webinar, you don't have to swing for the fences to make very nice returns and, if you keep getting hits – some of them are going to be home runs anyway.

As you can see, PFE has gotten back on track and is up about 10% since we re-picked it and look at the change in the LTP position from that little gain in the stock:

PFE Long Call 2023 20-JAN 30.00 CALL [PFE @ $37.16 $0.00] 50 9/28/2020 (646) $40,000 $8.00 $-0.38 $8.00     $7.63 $0.00 $-1,875 -4.7% $38,125
PFE Short Call 2023 20-JAN 37.00 CALL [PFE @ $37.16 $0.00] -50 9/28/2020 (646) $-23,000 $4.60 $-1.08     $3.53 $0.00 $5,375 23.4% $-17,625
PFE Short Put 2022 16-SEP 35.00 PUT [PFE @ $37.16 $0.00] -15 9/28/2020 (520) $-9,900 $6.60 $-3.20     $3.40 $0.00 $4,800 48.5% $-5,100

So now we're at net $15,400 from net $4,875 on the 9th but this is a $35,000 spread that's now 100% in the money, so certainly a keeper with over 100% left to gain on a trade we're very confident in.  For any other investing service, this would be their trade of the year but, at PSW – it's just leftovers….

Our net cash entry on this trade was $7,100, so we're up more than 100% already and $35,000 would be 5x back on the spread.  Since we can do with CONSERVATIVE positions on Blue Chip stocks with obvious growth potential – why on Earth would we waste our time and resources chasing after momentum stocks.  Are your momentum trades going to make you 400% in 2 years?  Then why mess around?  

UBS Group (UBS) is a nice, quiet Financial that stays out of trouble (unlike CS) and we know the rich have gotten substantially richer and UBS has been quietly handing the ultra-wealthy people's money since 1862.  UBS made $6.5Bn last year but probably closer to $5Bn going forward yet you can buy the whole bank for $55Bn at $15.64 and, even better, we can net into it as an even cheaper options play for the LTP:

  • Sell 50 UBS Jan $15 puts for $1.20 ($6,000) 
  • Buy 50 UBS Jan $12.50 calls for $3.60 ($18,000)
  • Sell 50 UBS Jan $15 calls for $1.85 ($9,250) 

That's net $2,750 on the $12,500 spread so we have $9,750 of upside potential in 9 months so, if you want to make $1,000 a month on a $2,750 cash outlay for the next 9 months – this is the trade for you!  Keep in mind we're promising to buy 5,000 shares at $15 ($75,000) so it's not light on the obligation front but then we'd turn around and sell 2023 $15 calls for $1.85 and drop our net 12% so, as long as we REALLY want to add UBS to our Financials for the long-term, there's not too much downside to this trade.  

See, even in this crazy market we can still find some bargains.



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