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Fallback Thursday – Volatility Picks up ahead of Payrolls

We're slipping a bit.

   

With global equities locked in a tight range for the past month, investors are on the lookout for any signs that central banks may start to withdraw emergency support. While Fed officials have mainly stuck to the message that stimulus will remain in place, inflation is perking up, with global food prices surging to the highest in almost a decade. Friday’s payrolls data could add another twist to the debate in the wake of Harker’s remarks, who said Wednesday that the U.S. central bank should begin discussing the time frame for paring back its bond-buying program

Trading volumes have been about half of what is normal in this post-holiday week and it's very easy to keep things afloat in a low-volume market but, when people begin to start trying to sell and there aren't enough sellers around – look out below!  We've seen this happen.  Remember in 2008 when so many people were trying to sell that the brokerage computers crashed and we had to call our brokers on the phone to try to sell stocks and were told "we'll do our best"?  You KNOW that can happen – that's why it's so important to hedge.

Insanity is certainly back in the market with AMC popping all the way to $70 during yesterday's session.  That's a $30Bn market cap for a company that made just over $100M in their best year and lost $149M in 2019 (not even a pandemic to excuse it) and lost $4.6Bn last year and project to lose $1.5Bn this year and another $377Bn in 2022.  So, at 10 TIMES their best year's earnings, it will take them 6 years (2028) just to make back the money they lost recently.   Still, it's an amazing stock – it's amazing they aren't bankrupt!  

Having learned their lesson the last time the stock insanely rallied to $20 in Feb (yes, that was considered ridiculous then), the company filed to sell 11.5M shares this morning, which will generate $690M at $60, which is more than they make in 6 years.  It's not profit but, if people are paying you $60 for your penny stock – take it!   Just remember, the idiots that are buying AMC for $60 are the same idiots who are pumping up the rest of the market and causing you to overpay for most stocks – don't be a sheep!

Year End 31st Dec 2015 2016 2017 2018 2019 2020 TTM 2021E 2022E CAGR / Avg
Total Revenue
$m

2,947 3,236 5,079 5,461 5,471 1,242 449 2,411 4,794 -15.9%
Operating Profit
$m

228 213 102 265 136 -3,986 -2,408      
Net Profit
$m

104 112 -487 110 -149 -4,589 -2,980 -1,465 -377  
EPS Reported
$

1.06 1.13 -4.75 0.846 -1.44 -39.2 -21.4      
EPS Normalised
$

1.15 1.53 -4.21 1.15 -0.811 -25.7 -18.7 -3.24 -0.834  
EPS Growth
%

+84.4 +33.0                

Earlier this week AMC raised $230 million from Mudrick Capital in an offering the company said "will allow us to be aggressive in going after the most valuable theatre assets, as well as to make other strategic investments in our business and to pursue deleveraging opportunities," which is a fancy way to say they are restructuring to avoid bankruptcy (hopefully).  As noted in this morning's filing:  

"We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last," the filing said. "Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment." The emphasis on this passage is the company's. 

The filing goes on to discuss short squeezes, social media, retail trading platforms and a host of other factors that AMC believes might be driving volatility in its share price. And for all of this, AMC reiterates time and again, the company is not responsible and offers no assurances to existing or prospective shareholders that any of this makes sense or will last. 

Bed Bath and Beyond (BBBY) was also favored by the manipulators again yesterday with a 62% gain for no particular reason.  BBBY was a Top Trade Alert (sign up here) back last April 20th but it was $4.55 at the time.  Our trade idea for our Long-Term Portfolio was:  

Very tempting down here!  I think, for the LTP, we may as well pick up the 50 of the BBBY 2022 $3 ($3.55)/10 ($1.45) bull call spreads at $2.05 ($10,250) and sell 20 of the 2022 $5 puts for $2.62 ($5,240) for a net $5,010 entry on the $35,000 spread so $29,990 (598%) upside potential if BBBY can get back to $10 in 20 months.  

Clearly it's on track to collect the entire $35,000 but we cashed it out early as it made about 90% of it's potential prematurely – there was no sense in waiting for the last 10%.  As I was saying in yesterday's Webinar, there's no sense chasing these momentum stocks when you can make 598% on a value stock, is there?   

Another of our Trade Ideas that got some loving yesterday was Pet Med Express (PETS) because I know my Mom spends a fortune keeping dogs alive and, if you want to be able to afford to pamper your pooches, you should make investments like this a part of your portfolio.  I'll reprint the Trade Idea from our October 27th, PSW Report (sign up here) so you can ponder our strategy in retrospect:  

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.

 


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  1. Good Morning.


  2. Pets coming down more to reality, Sure some crazy buyers yesterday. Some of the cliff jumpers are already losing a lot of money. 

    I trust Phil did better with his 45 caller.


  3. Good morning. Here is the replay of yesterday's webinar

    https://youtu.be/D_CrSi2PyNQ


  4. Good morning!

    PETS/Yodi – Didn't get to $10 so no sale, unfortunately.   Hit $9.50 and I would have taken that if I'd known in time but it was at the close.

    API showed a 5.4Mb draw in oil, a 2.1Mb draw in gasoline and a 500K draw in distillates so we'll see what EIA says at 11.

         

    This is a big deal – world is going to change very quickly:

    DJ Armed Low-Cost Drones, Made by Turkey, Reshape Battlefields and Geopolitics
    (Dow Jones 06/03 09:36:10)

    SHALL WE PLAY A GAMEBy James Marson in Istanbul and Brett Forrest in Washington
         A soldier idles by a Russian-made T-72 tank. A moment later, a missile
    fired from a drone slams into the vehicle, exploding in an orange flash,
    blowing the man off his feet and leaving the tank a smoldering wreck.
         The scene is one of dozens of aerial videos that were posted online in
    Azerbaijan last year showing off a new weapon. Over six weeks, it helped the
    nation regain territory in the Nagorno-Karabakh region that had been held by
    Russian-backed Armenian forces for more than two decades. The videos show
    attacks on tanks, trucks, command posts, mortar positions and radar
    installations.
         Smaller militaries around the world are deploying inexpensive
    missile-equipped drones against armored enemies, a new battlefield tactic
    that proved successful last year in regional conflicts, shifting the
    strategic balance around Turkey and Russia. Drones built in Turkey with
    affordable digital technology wrecked tanks and other armored vehicles, as
    well as air-defense systems, of Russian protégés in battles waged
    in Syria, Libya and Azerbaijan.
         These drones point to future warfare being shaped as much by cheap but
    effective fighting vehicles as expensive ones with the most advanced
    technology.
         China, too, has become a leading war drone exporter to the Middle East
    and Africa. Iran-linked groups in Iraq and Yemen used drones to attack Saudi
    Arabia. At least 10 countries, from Nigeria to the United Arab Emirates,
    have used drones purchased from China to kill adversaries, defense analysts
    say.
         "The implications are game changing," U.K. Defense Secretary Ben Wallace
    said in a speech last year, citing Syria's heavy losses to Turkish drones.

    Angel Has Fallen Steelbook - (GERMAN IMPORT) Blu-Ray Region B NEW | eBay
         Flying alone or in a group, these drones can surprise troops and disable
    poorly concealed or lightly defended armored vehicles, a job often assigned
    to expensive warplanes. The drones can stay quietly aloft for 24 hours,
    finding gaps in air defense systems and helping target strikes by warplanes
    and artillery, as well as firing their own missiles.
         Militaries, including the U.S., are upgrading air-defense systems to
    catch up with the advances, seeking methods to eliminate low-budget drones
    without firing missiles that cost more than their targets.
         The U.S. Air Force Research Laboratory is also developing Skyborg and
    Valkyrie, lower-cost autonomous aircraft that are part of an innovation
    program. "Our adversaries are already fielding technologies that will hold
    our legacy platforms at risk," an Air Force official said in a statement.
         Israel and the U.S. have long used high-end drones in counterterrorism
    operations to target prominent enemies. But the countries have hesitated to
    sell their top models, even to allies, for fear of proliferation.
         Responding to drone deals that China and other producers have struck with
    countries shunned by the U.S., the Trump administration last July relaxed
    its export policy somewhat, potentially boosting sales of more capable
    models than previously allowed. The United Arab Emirates said in January it
    had agreed to buy 18 U.S.-made MQ-9 drones for nearly $3 billion.
         Technological advances and global competitors have produced inexpensive
    alternatives. The standard-bearer of the latest armed-drone revolution
    emerged last year on the battlefields around Turkey, the Bayraktar TB2.
         Compared with the American MQ-9, the TB2 is lightly armed, with four
    laser-guided missiles. Its radio-controlled apparatus limits its basic range
    to around 200 miles, roughly a fifth of the ground the MQ-9 can cover.
         Yet it is utilitarian, and reliable — qualities reminiscent of the
    Soviet Kalashnikov AK-47 rifle that changed warfare in the 20th century. A
    set of six Bayraktar TB2 drones, ground units, and other essential
    operations equipment costs tens of millions of dollars, rather than hundreds
    of millions for the MQ-9.
         The drone's Turkish producer, Baykar, which started in 1984 making auto
    parts, boasts of more bang for the buck. Qatar and Ukraine are customers.
    Poland, a North Atlantic Treaty Organization member, said last month it
    would buy 24 TB2 drones. Several other NATO allies are interested, as well
    as countries in Africa and Asia, Turkish government and company officials
    said.
         Turn the tide
         The TB2 drone gained international notice in the skies over Syria in
    early 2020.
         Toward the end of February, the Syrian regime, backed by Russia, was
    advancing on the city of Idlib, which was held by rebels supported by
    Turkey. After an air raid killed more than 30 Turkish soldiers, Turkey
    embarked on Spring Shield, an operation that integrated drones with
    electronic warfare systems, ground troops, artillery and warplanes.
         The drones, quiet and hard to spot on radar, flew for hours seeking gaps
    in air defense systems, which fell "like domino tiles" once breached, said
    Haluk Bayraktar, chief executive of Baykar. The vehicles operated in groups
    of a dozen or so to attack targets simultaneously, Turkish government and
    company officials said.
         Ismail Demir, head of Turkey's state body overseeing the defense
    industry, said the low cost of these drones allows military forces to take
    more risks with them. "If you lose one, two, three," he said, it doesn't
    matter as long as others find a target.
         Last spring, the TB2s helped turn the tide in the Libyan civil war for
    the Tripoli-based government, which is backed by the United Nations.
         Turkey had sent arms in 2019 to stem an assault on the capital by militia
    leader Khalifa Haftar, who is supported by Russia and others. In 2020,
    Turkey increased military support. Improved drone tactics honed in Syria
    provided the upper hand against Russian-made surface-to-air missile systems
    known as Pantsir, handing the Tripoli government aerial supremacy. By June,
    Mr. Haftar's forces retreated from Tripoli.
         The success of the drones has helped Turkey President Recep Tayyip
    Erdogan, an at-times fractious U.S. ally, to expand his regional influence
    without risking significant numbers of troops or costly equipment.
         While Turkey's enhanced capabilities may benefit NATO, fellow members
    worry that the ability of Mr. Erdogan to deploy and sell drones could
    embolden his assertive pursuit of a more independent foreign and security
    policy.
         "The U.S., like a lot of European partners, is leery of Turkey's drone
    exports and the aggressive way Turkey has been using drones in these
    conflicts," said Dan Gettinger, a researcher at the Mitchell Institute for
    Aerospace Studies, a nonpartisan policy research group in Arlington, Va.
         Mike Nagata, a retired U.S. Army lieutenant general in special
    operations, said drones were "part of a much larger challenge regarding the
    future of the relationship between Turkey and the United States and NATO."
         Bloodied ground
         Ukraine signed a deal in January 2019 to buy TB2 drones from Turkey,
    receiving at least six so far, and Kyiv is in talks for joint production. A
    Ukrainian company is manufacturing engines for the latest Baykar drone, a
    larger model with a heavier payload than the TB2.
         The country hopes the drones will discourage a repeat of the Kremlin's
    2014 invasions. "They allow us to deter Russian aggression or to retaliate
    if they invade," said Yuriy Mysyagin, deputy head of the defense committee
    in Ukraine's Parliament. "We saw how they performed last year."
         Ukraine's military in March posted details of flight-training over the
    Black Sea some 50 miles from Crimea, which Russia annexed in 2014. The
    Defense Ministry declined to comment further.
         Turkey's drone sales have riled Moscow. Citing rising Turkish Covid-19
    cases, Russia in April suspended most air travel between the two countries
    through June 1, starving Turkey of Russian tourists who visit during May
    holidays. Russia this week extended the suspension three weeks.
         Mr. Erdogan told Ukrainian president Volodomyr Zelensky during an April
    meeting in Turkey that Russian President Vladimir Putin threatened to extend
    the flight ban unless Turkey pulls back from its drone sales and support to
    Ukraine, according to a person briefed on the conversation.
         Neither the Kremlin nor the Russian Defense Ministry responded to
    requests for comment.
         Turkish officials say they aren't seeking conflict with Russia by taking
    on its allies. Turkey has close energy ties with Moscow, and it purchased an
    advanced Russian air-defense system, leading to sanctions from the U.S.
         The TB2 was born of Turkey's dissatisfaction with available models from
    the U.S. and Israel, and the country's desire for systems under its control
    to fight the PKK, a Kurdish militant group.
         "Those countries did not cooperate with us sufficiently, so we had to
    launch our own program," Mustafa Varank, Turkey's minister of industry and
    technology, said in an interview. "Turkey is now reaping the fruits of
    taking the right decisions at the right time."
         Baykar emerged as a leader among several Turkish drone producers after
    spotting a niche in the early 2000s, said Mr. Bayraktar, the company's chief
    executive. His brother Selcuk Bayraktar, who took advanced studies at the
    Massachusetts Institute of Technology, came up with flight-control software
    and guidance systems while using off-the-shelf components.
         During development, company officials set up a workshop at a military
    base to get a firsthand understanding, including from a colonel who took
    them to a patch of bloodied ground where, they said, Turkish soldiers were
    killed by the PKK.
         In 2007, Turkey launched a national competition to supply mini drones,
    which yielded an order of 76 from Baykar. At the time, the U.S. wouldn't
    sell armed drones to Turkey. Baykar developed the TB2 and gradually replaced
    foreign components with locally produced ones. In 2015, the company
    successfully test-fired a precision-guided munition.
         Turkey's military initially used the drones within its own borders and in
    northern Iraq and Syria. Soon, Mr. Erdogan deployed them in wars near
    Turkey's borders.


  5. Drones – A good reason to practice your skeet shooting….


  6. 1020   a shotgun is no match for a missile 


  7. Man just think of the Bazillions Bezos could make if he branched out with .. Amazon Arms.  Missile laden drones at your fingertips. What could go wrong??


  8. Stock – Who's using a shotgun?… ;)


  9. Jeddah – and no background check required….


  10. Bezos/Jeddah – I'm sure you can still reprogram them to deliver cluster bombs.  


  11. What about some trade talk? Who did actually take advantage of yesterday's search of PETS. Unfortunately I did not wait for the 45 caller to mature but sold the 40 caller against all the stock I hold. So fare 3K profit!!!!


  12. Thanks Phil – I wondered where 'ol Droney had been… B.O. sure loved his drones.


  13. Yodi / PETS – I sold the June 45 for $5.90. Its down to $1.70 this morning. Had I waited until the end of the day I could have gotten over $7 for it. Now, should I hold for two weeks to get the rest of the premium or take my gift horse and run?


  14. daveo, great at least one person saw the sheep jumping. I personally have no rush to buy back today. I expect the stock will settle above 30 finally.


  15. BSM closed a play bought stock and sold the Jan22 10 put for 9.20 net cost per 100 stock and one option.


  16. any word on oil report phil


  17. Yodi- I received the CHL dividend on 5/20. 

    My contact with IB has been limited to a few phone calls and using the "help" function on the platform. If you wade through the menus there is a list of phone number contacts. For Europe:

    Europe

    00800-42-276537 Toll free3
    +41-41-726-9500 Direct dial

    +44 207-710-5695 Direct dial United Kingdom

    00:00 – 09:00 (Mon – Fri) (America/Los Angeles)


  18. Ptas Thanks for the info. I did sent them an email finally. It might be possible my stock was converted too late for this div.???


  19. EIA was nowhere near as supportive as API (net even) so oil took a little dip back below $68.50 – I'm comfortable staying short here over the weekend.

    PETS/Yodi – Yes, I was greedy with my target, unfortunately. 

    PETS/Dave – I'd set a stop at $2.50 so you have 2:1 reward/risk for holding.

    CHL/Pstas – There's some noise about a revision to the Administration policy in the works but could be good or bad.


  20. SEC Has Limited Options to Regulate Elon Musk


  21. EXPLAINER: Why ransomware is so dangerous and hard to stop



  22. Quantum computing with holes







  23. AMC from 30% down for the day into double digits green. Mind blowing.


  24. AMC/Monk – So tempting to short them when they do that but that can turn into disaster too.

    I'm just happy if PETS holds onto some progress.

    GME still amazing:

    $265 is $20Bn for this:

    Year End 30th Jan 2016 2017 2018 2019 2020 2021 2022E 2023E CAGR / Avg
    Total Revenue
    $m

    9,364 7,965 8,547 8,285 6,466 5,090 5,361 5,167 -11.5%
    Operating Profit
    $m

    648 482 439 -702 -400 -238      
    Net Profit
    $m

    403 353 34.7 -673 -471 -215 -61.2 -34.7  
    EPS Reported
    $

    3.78 2.93 2.27 -8.01 -5.31 -3.30      
    EPS Normalised
    $

    3.80 3.07 2.31 -1.54 -1.92 -3.47 -0.903 -0.530  
    EPS Growth
    %

    +9.12 -19.3 -24.6            
     

  25. Good day, Phil/T/NVDA

    I don't know if you have discussed T since their Warner division merger with Discovery but I would like your thoughts on it and whether you think T makes for a good vehicle if one's primary goal is dividends.

    NVDA: seems to have reported great earnings and they are in all things that are in great demand for the future..do you think it's investable here or is a sell after the run up in last month from $550 to $685?

    Appreciate your time and input!


  26. NVDA run up is partially due to the 1:4 stock split next month


  27. T/Maya – I love T as a long-term dividend payer.  Your primary goal can't be growth with them as they pay out like a REIT.  At $29.29 they are low in their channel and people will get a better handle on what they look like going forward post-earnings (July $22).   Meanwhile they pay 0.51/q while you wait, which is 7% so what's not to like?  As a new trade, I'd start by selling the 2023 $30 puts for $5.15 as that nets you in for $24.85 in the worst case and it's more than the dividends.  If T breaks over $30, then you can Sell the 2023 $32s, which are now $1.40, for $1.60+ and buy the stock to cover ($30) and then you are in for net $23.25 with a call away at $32 or, if assigned the puts, you are in 2x at $26.62 avg.

    NVDA/Maya – $682 is $420Bn and maybe they make $10Bn so 40x is not something I'd be jumping on.  They had a great year last year but how much of that was stimulus checks paying for new laptops?  I wouldn't bet against them, they are a great company but other people have made a fortune in the last two years running from $150 to $680 – I can't see betting they keep growing at this pace – as noted by Bert, they have gone ballistic into the stock split.

    Biden/Pstas – So worse it is…

    An executive order Mr. Biden signed Thursday brings to 59 the total number of Chinese companies banned from receiving American investment and shows how his administration is continuing some of the hard-line China policies left by former President Donald Trump.

    The new order prevents Americans from investing in those companies, with a 60-day grace period, until Aug. 2, before sanctions begin and a one-year period for Americans already invested in the firms—either directly or via mutual and index or other funds—to divest themselves.


  28. Biden’s Budget Signal to the Fed

    His economists assume negative real interest rates for a decade.

    Granted, it is the WSJ Opinion piece so It is safe to stipulate a right of center bias. However, the budget analysis and underlying assumptions raises some rather interesting issues, politics aside. The analysts, pundits and prognosticators of late have ruminated on asset prices and interest rates many of whom posit low rates may/will not last forever thus exposing the foundation quicksand of extended prices. So, are we to put faith in this administration's expectations and party on or is this just the usual political gaslighting surrounding legislative sausage making? 


  29. Phil/T

    Thanks.

    I guess I am concerned about the dividend being cut as stated by their CEO when the Warner-Discovery deal was announced.

    so, if they cut the current annual dividend of $2.04 by 43%, as he implied, that takes it down to $1.16 annually and the yield is no longer 7% .

    With that, I wonder if the stock drops to the $24-26 range?


  30. Rates/Pstas – A lot of that stuff is based on many false assumptions piled on top of each other.  It's just a continuation of the previous BS and it's a very hot potato for whoever has to finally admit the US will have to borrow money at more than 1% down the road.  Funny how the WSJ never managed to point it out when Trump's Budget used the same calculations, right?

    Here's Trumps 2019 projections:

    Nailed it!  

    T/Maya – Of course they should cut the dividend, it's silly.  So if it's down to 4% and you can supplement it by selling a few short calls – who cares?  I would rather they use more money to grow the company than just keep giving it back to the shareholders and anyway, that's why I said I'd start with just the short puts.  It's a cheap entry with an 18-month look and you collect more than the dividends would pay over 18 months.

    Nasdaq and RUT had bad days, down about 1% but Dow and S&P mainly recovered.  

    Non-Farm Payroll should be strong tomorrow.

    TSLA had a bad day, down 5%.


  31. T/Maya – My understanding is also that you would get a spin off of X # of shares in the new Discovery Warner Media, and retain your T shares. I know a lot of details need to be provided, so it could be different. But, if you have 1000 T shares at $30, and get 1000 DWM shares at $6 and your residual T drops to $24, that's fine/equal. 

    I do think the optios will become messy post split – at least for me, I don't like managing LEAPs through a spin off, since you can end up with very thinly traded contracts if you're trying to buy/sell 100+ contracts. But, just my thoughts. 


  32. Rick/T

    Thanks for your thoughts