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Weakening Wednesday – Markets Drift Into the Holiday Weekend

Not much going on in May.

We started the month at 4,200 on the S&P 500 (see "Testy Tuesday – S&P 4,200 (again)" for the technical perspective) and this morning we're at 4,196 and the Dow is 1% higher and the Nasdaq is 2.5% lower and the Russell is 4% lower as earnings have, overall, been good but not great and, as I mentioned last week, economic surprises have been mostly to the downside recently.  None of this matters at the moment because no one is trading this week with daily volume on the SPY barely 50M, roughly half the normal level (and most of that is automatic pension trading).

There's not a whole lot to do in a week like this and people are simply not into working as it's the first 3-day weekend in more than a year when we can kind of, sort of go out as if everything is normal.  Normal enough, in fact, that Fast and Furious #9 made $162M last weekend in foreign markets (it doesn't open here until late June) so that's going to be a blockbuster – the first one in a very long time.  IMAX was one of our pandemic picks and we got out when they spiked over $20 in March simply because we had already made 90% of our intended profits and there was still a risk of another virus wave but 40% of the US is now vaccinated and $135M of F9s money was made in China, which is IMAX's #1 foreign market, so I'd say this company is back on track going forward.  

At $21.61, IMAX has a $1.28Bn market cap and, pre-pandemic, they were making $50M but they lost $144M last year and this year is likely to be a small loss as well but by 2022, they should be showing the growth that comes from new theater installations that were made duringt he shut-down and, of course, movie releases will be back on track as well.  We don't expect a huge move up but we expect steady, long-term growth, which makes it a good candidate for our Butterfly Portfolio as follows:

  • Sell 10 IMAX 2023 $20 puts for $4 ($4,000) 
  • Buy 20 IMAX 2023 $20 calls for $5.75 ($11,500)
  • Sell 15 IMAX 2023 $27 calls for $3.20 ($4,800)
  • Sell 10 IMAX July $22 calls for $1.20 ($1,200)
  • Sell 5 IMAX July $21 puts for $1 ($500)

That's net $1,000 on the $14,000 spread so we have $13,000 (1,300%) upside potential if IMAX is over $27 in Jan, 2023 but the real play here is that Jan 2023 expiration is 604 days away and we've sold $1,700 in premium over 51 days so 10 sales like that would yield $17,000 ON TOP OF the long position.  

The base position is the 2023 $20/27 spread that is 3/4 covered and we sold the short puts as we REALLY don't mind owning 1,000 shares of IMAX at $20.  After that, we begin "renting out" our position by selling puts and calls and we can sell 10 puts and 5 calls because our long spread has 5 extra longs so the harm to us, should IMAX take off, it no more than the 5 extra short calls and the puts and calls can't both be in the money at the same time.  We're not worried about IMAX going up as we have $13,000 coming to us if it does well, which would cover 500 $22 calls all the way to $48.  To the downside, our risk increases to owning 1,500 shares eventually – but there are many rolls in our future before that happens and we always play IMAX when it's down so, at $10, we're very likely to double down to average 3,000 at about $15 – that's a worst-case we would be pretty happy with!  

Misunderstood stocks like IMAX are fun to play.  Traders tend to move the stock up and down violently based on the latest box office which is, of course, not under IMAX's control.  Meanwhile, they just keep installing more and more theaters and now they are installing home/yacht theaters at $400,000 a pop - selling 100 of those a year would add 10% to revenues and the full roll-out was delayed by Covid but the company expects to move forward later this year.

Ford (F) is another misunderstood company which, unlike Tesla (TSLA), makes a lot of money selling lots of cars.  In a normal year, F makes about $5Bn but last year they lost $1.2Bn and this year they expect to make $4Bn but, at $12.81, you can buy the whole company for $51Bn and we already have a big position on F in our Butterfly Portfolio but we closed it out in our Dividend Portfolio so, for that one, let's:

Sell 20 F 2023 $12 puts for $2.15 ($4,300) 

Here's we're promising to buy 2,000 shares of F for net $9.85, which is 23% below the current price.  We KNOW we'd love to own F for that price and, if not, we're happy to keep the $4,300.

Ford is making some major electric vehicle announcements today so, for our Future is Now Portfolio, we can add the following play on F:

  • Sell 20 F 2023 $12 puts for $2.15 ($4,300) 
  • Buy 30 F 2023 $10 calls for $4.40 ($13,200) 
  • Sell 30 F 2023 $15 calls for $2.10 ($6,300) 

That's net $2,600 on the $15,000 spread so we've got $12,400 (476%) of upside potential and we're half in the money to start.

See, we're still finding some nice bargains – even in this toppy market.  

 


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  1. Good morning everyone. Here is the link to today's webinar.

    https://attendee.gotowebinar.com/register/1797588676957045772


  2. Good morning!


  3. Good morning! 

    In the LTP, let's sell 50 of the F 2023 $12 puts for $2.15 ($10,750) as well.  If we can't get that (F is popping), I'd rather sell 30 of the $15 puts for $4 ($12,000) than capitulate.  That would be net $11 vs net $9.85 but we could always DD on the 3,000 and bring ourselves down to the same $9.85 if F tanks for some reason.


  4. Notice the theme to our recent plays:  X, RIO, F, IMAX, SPWR, WBA, TD – lots of stocks we don't mind holding for the very long-term that already have a market which is hard to imagine them losing in any sort of short order.  These are generally conservative picks but still good for 300%, 400%+ upside if the good times keep rolling.  


  5. Good Morning.


  6. Phil / NRG, I have uncovered 2023 $30 calls per a previous trade idea. They are in a relentless downtrend. I cannot find  any news indicating why.  Any thoughts/ new perspectives?


  7. Jeddah/NRG--

    I have the same thing — I have an order in to roll down to the 25's @ 2.50 — but I don't think it will get there…(3.90)  I want to take advantage of the dip/downtrend but not seeing the price action needed to do so.


  8. Jeffl – I was hoping for support @ 33.5 but broken. Maybe we see 30





  9. Mad about high gas and lumber prices? Turns out Joe Biden isn’t to blame after all


  10. Phil/X In your post about X yesterday, you mentioned to sell the $17 puts for $3.50 but in your actual post you showed the $15 puts (also for $3.50) but perhaps you meant to sell the $15s?

    Sell 10 X 2023 $15 puts for $3.50 ($3,500) 

    Buy 20 2023 $20 calls for $9.50 ($19,000)

    Sell 20 2023 $30 calls for $6.20 ($12,400)


  11. NRG/Jeddah – They took a $750M hit on the storm in Feb and that's about a year's income so 20% off over 5 years is how that comes back.  At $33, they are $8Bn in market cap and they make $1Bn in a good year so nothing wrong with them going forward for the long-term.   In the LTP, we took a flyer back in March but it was small and now I think we're at a good bottom.  Our initial trade was (we bought back the short calls):

    NRG Short Put 2023 20-JAN 28.00 PUT [NRG @ $32.81 $0.06] -10 3/17/2021 (604) $-4,200 $4.20 $-0.50 $-4.20     $3.70 $0.00 $500 11.9% $-3,700
    NRG Long Call 2023 20-JAN 30.00 CALL [NRG @ $32.81 $0.06] 10 4/27/2021 (604) $9,000 $9.00 $-2.05     $6.95 - $-2,050 -22.8% $6,950

    I don't have a problem with the $28 target so we can leave those but let's roll our 10 2023 $30 calls at $7.30 ($7,300) to 20 of the 2023 $25 calls at $9.25 ($18,500) and I want to sell the 2023 $35 calls, now $4, for $5 when they come back a bit.  

    X/Wing – For sure in the Earnings Portfolio it would be the $17 puts to be sold for $3.50, not the $15s, which are currently $2.65.  


  12. Webinar time (15 mins)!


  13. Phil/NRG – the pricing on the NRG roll is way out of whack… You have it priced at $1.95 to roll when it's closer to $4.00 (and has been).  Would you still roll at $4 or $3.50?


  14. NRG/Jeff – I answered you in the Webinar but then I realized you might not be on it.  

    What I said was, what's our premise?  Our premise is that NRG is bottoming here and we want to DD on the longs and sell the $35 calls when they hit a target and also sell our $30 calls (as part of a roll).

    As you can see, we were able to buy the $25 calls for $9.25, mission accomplished:

    So far, we can only get $6.20 for the $30s, the bid/ask have dropped to $4.20/6.10

    Our premise is to be long and it's a small position so not too much risk just being long 20 of the $25 calls AND 10 of the $30 calls for now but, even if we do sell them for $1 less than goal, it only impacts the 2x longs by 0.50 per contract – not terrible.  I would certainly rather wait to get our price.  

    As to the short $35 calls we hope to sell for $5 – we'll have to wait for that too.  

    If NRG drops to $30 (10%), the delta on the $25s is 0.76 so about $2.25 would be lost there but then the $20s with an 0.88 delta would also be cheaper so we could do that roll and sell the $30 calls instead.  Since the downside of having 40 (I'd DD again) of the $20 calls for about $12, which puts us at the money at $32, is not unappealing – I don't mind taking the risk now to hopefully catch a better price on the spread.  


  15. Oh, and I'd certainly sell more puts if they dropped that low.


  16. Phil/

    Any futures position added in the webinar?


  17. Nothing new, we went over what we did this week.   I have to hit a meeting shortly so that's it for my day. 

    Indexes all boring except the RUT, which has blasted 1.8% higher for whatever reason.