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Record-High Wednesday – Stop Worrying and Love the Rally?

Up and up we go.

We're hitting new record highs this morning but there's an awful lot of protective hedges being sold as traders are starting to cover their bets.  With U.S. equities rising for seven months running, the market underbelly shows institutional managers are bidding up protective options, while signs of restraint are emerging in the speculative world of retail investing

Rather than add more hedges, we simply cashed out positions but yesterday we added two positions to our Money Talk Portfolio that can make $53,500 by Jan 2023 and we can keep doing that with our cash every week and make another $2,782,000 in a prolonged rally – so we certainly don't have any fear of missing out.

In our Live Member Chat Room yesterday, we were discussing Rio Tinto (RIO) who are $15 off their highs after paying out a $5.61 special dividend on August 12th and $75 per share is a $121Bn market cap for a complany that made $10Bn last year and made $12Bn in the first half of this year – so it sure seems cheap to me!  

When a stock is volatile like this, you take advantage of it by selling puts, which are promises to buy the stock at a set price on a later date.  At the moment, the 2023 $62.22 puts are $7.15, which means you get PAID $7.15 in exchange for your promise to buy RIO for $62.22 between now and January, 2023.  You can be assigned the stock at any time so make sure you REALLY want to own it but, no matter what, you get to keep the $7.15/share.  

That means, even if assigned at $62.22, the net cost of the stock would be $55.07 per share, which is $20 (26%) below the current price.  We can also establish an ownership position buy buying 2023 $72.22 calls for $10 and selling 2023 $82.22 calls for $5.50 for net $4.50.  That means we can do this:

  • Sell 5 RIO 2023 $62.22 puts for $7.15 ($3,575) 
  • Buy 7 RIO 2023 $72.22 calls for $10 ($7,000) 
  • Sell 7 RIO 2023 $82.22 calls for $5.50 ($3,850)

That spread works out to a net credit of $425 so we no longer have as much of a discount if assigned and we'd end up owming 500 shares of RIO at $62.22, less and 0.85/share credit for net $61.37, which iss still $13.70 (18.2%) below the current price.  So that's our worst case and our best case is RIO goes up and we collect $7,000 for the spread and keep the $425 for a $7,425 (1,747%) gain on our cash outlay.  Aren't options fun?  

We already have a more aggressive play in our Long-Term Portfolio but if RIO goes any lower, I'll be adding it to more of our portfolios – as this is a really nice way to generate some income.  As our risk is owning 500 shares of RIO for $30,685, in a $100,000 portfolio with $200,000 in buying power, we could have 7 trades like this and our upside potential would be $51,975 – a very nice return for 16 months.

In reality, as a trade like this matures, we downgrade our presumed risk and we're able to go on and open up another trade, so we can end up with 14 trades instead of 7 in a good market.  That's why we don't fear missing out in a market that never goes down – we can always string together a group of trades that will give us very nice returns without too much downside risk.  

Meanwhile, we're waiting for 2024 options to come out so we can sell more premium, which gives us better hedges.  Apple (AAPL) has Sept 2023s out so we're almost there.  With AAPL at $151.83, you can sell the Sept 2023 $105 puts for $7, which puts you into the stock at net $95, more than 33% below the current price. 

Now THAT one we can put in our LTP, as we'd LOVE to own AAPL for a 33% discount.  It will probably never happen but then we'll keep the money so, in our $2M portfolio, we can buy $200,000 worth of AAPL and that would be 2,000 shares at $98 which means we can sell 20 puts but we can start with 10 and see how they go – still pocketing a nice $7,000 for promising to buy AAPL for 33% below the current price.

Aren't options fun? 


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  1. Good Morning.

  2. Phil / Covered Call ETFs-

    Can i get your thoughts on covered call ETFs like QYLD, SLVO, & USOI.  Their dividend yield seems higher than what I could return selling covered calls on my own monthly.  Could this be a buy & hold w/ hedge strategy?  Thanks!

  3. Covered call ETFs are a really bad idea. If you assume a 100% margin (i.e. buying $200 worth of stock and selling 2 calls against $100 cash), the yield will be higher than the ETF (no fees). Second, it is a simulation of selling OTM calls (USOI is 6% OTM) – so if the underlying falls 10% one month, and rebounds 11% the next month, the underlying will have lost 0, but the ETF will have lost money because of the 6% OTM call sold for month 2. I think QYLD hasnt moved in 5 years, so you lose money on volatility, you lose out on gains, and because of the 6% OTM monthly, there is minimal protection on the downside. 

  4. Good morning!  

    So much for that good start. 

    As I thought, the gas stations aren't buying but the refiners are cranking it out and drawing down the oil.

    • Pfizer (NYSE:PFE) announced that the first patient was dosed in a pivotal Phase 2/3 clinical trial designed to evaluate PF-07321332, the company’s investigational oral therapy targeted at non-hospitalized, symptomatic COVID-19 patients.
    • The randomized double-blind trial will enroll more than 1,100 participants who will receive a combination of PF-07321332/ ritonavir or placebo.
    • PF-07321332 is designed to block the activity of the main protease enzyme that the COVID-19 virus needs for replication.
    • A low dose of ritonavir is used to slow down the breakdown of PF-07321332, enabling the antiviral agent to last long inside the body at higher concentrations.
    • With PF-07321332, Pfizer (PFE) aims to treat adult COVID-19 patients who are not at risk of developing the severe form of the disease.
    • Pfizer has previously said that the company is seeking to file for emergency use authorization of PF-07321332 in Q4 2021 subject to a positive outcome in the trial.
    • Currently, only remdesivir from Gilead Sciences (NASDAQ:GILD) has won the FDA approval as an antiviral against COVID-19.
    • On Wednesday, Merck (NYSE:MRK) and Ridgeback Biotherapeutics also announced the initiation of a late-stage trial for their experimental antiviral molnupiravir in the prevention of COVID-19 infection.
    • Stock index futures are pointing to a higher open to kick off September after the broader market recorded its seventh-straight winning month.
    • S&P futures (SPX) (NYSEARCA:SPY), Nasdaq 100 futures (NDX:IND) (NASDAQ:QQQ) and Dow futures (INDU) (NYSEARCA:DIA) are all higher.
    • The major averages closed lower yesterday, with some pressure felt from disappointing economic numbers.
    • Along with a drop in Chicago PMI, with the price gauge at a multi-decade high, consumer confidence also sank.
    • The Conference Board said its Consumer Confidence Index for August sank to 113.8 from a downwardly revised 125.1 in Juneits lowest level since February and well shy of forecasts of 123.
    • But that brings the Conference Board's measure more in line with the University of Michigan's consumer sentiment survey, which is positive, according to Morgan Stanley.
    • Michigan's final August measure came in at 70.3, down from 81.2 in July.
    • "Friday's release of the University of Michigan's final consumer sentiment survey results for July confirmed the preliminary release earlier this month," Mike Wilson, chief U.S. equity strategist at Morgan Stanley, wrote Monday. "In fact, the spread between the UMich and Conference Board consumer confidence surveys has never been this wide and it's usually a sign of recession." (Emphasis added.)
    • That spread is now more than 11 points narrower.
    • While Morgan Stanley doesn't think a recession is coming, Wilson did express concerns a widespread could be "foreshadowing a much worse slowdown/payback than what most are expecting."
    • If that does prove to be the case, he recommends Health Care (NYSEARCA:XLV) and Consumer Staples (NYSEARCA:XLP), with long duration growth stocks facing challenges meeting earnings expectations.
    • If the recovery gains steam, Wilson still isn't leaning to growth, with megacap stocks facing pressure from higher rates.

    • July Construction Spending+0.3% M/M to $1,568.8B vs. +0.2% consensus, +0.1% prior.
    • Construction spending +9% Y/Y vs. +8.2% prior.
    • August ISM Manufacturing Index59.9 vs 59.0 expected and 59.5 prior.
    • New Orders to 66.7 from 66.0.
    • Production to 60.0 from 58.4.
    • Employment to 49.0 from 52.0.
    • Supplier Deliveries 69.5 from 72.5.
    • August PMI Manufacturing Index61.1, vs. 61.2 consensus, 63.4 prior.
    • PMI gauge was slightly softer than that seen in July, the expansion was supported by steep upturns in production and new orders.
    • New orders continued to increase midway through the third quarter, as client demand rose markedly.
    • A recap on retail and e-commerce from Wells Fargo in the wake of second-quarter earnings highlights what it notes are twin dynamics having an impact on the space this summer: fairly positive results from back-to-school season, against a supply chain problem that has been getting worse.
    • The solid start to back-to-school speaks to a healthy consumer, it says (also noting "incrementally restrained" promo levels vs. July). But Vietnam factory closures into September are just the latest wrench in supply chain issues that are driving lost sales and higher cost pressures.
    • And after some "whipsaw" moves for the stocks around earnings, Wells Fargo says the setup in the second half is still tricky amid inflationary pressures, the ongoing uncertainty around COVID-19 and the Delta variant, and retailers trying to digest those potential lost sales from the supply problems.
    • Inventory checks are healthy, though, and it notes that year-over-year, August's percentage of "less promotional" checks far exceeded "more promotional" for the ninth month in a row, and that re-accelerated this month.
    • The wholesale channel also looks "quite clean," and clearance levels tightened further in August.
    • "While companies across our space have been maximizing full-price selling by operating with lean inventory levels, we would be concerned that this incremental pull-back in promos is due to international and domestic supply chain congestion which are making it difficult (and expensive) for retailers to receive their goods on time," the bank says. "Based on our conversations with covered companies, we expect these supply chain constraints are likely to persist through holiday and even into spring 2022."
    • Meanwhile, Wells Fargo says tracking Web traffic is now as relevant as (or more than) brick and mortar traffic in gauging a brand or retailer's health and performance, with e-commerce increasingly critical. It tracks data for about 65 different brands, and estimates that in 2020, some 4-5 years of online penetration growth were pulled forward into a single year.
    • And while overall growth is healthy on a two-year-stacked basis, there's some downward pressure vs. the growth from 2020 and the first half of this year.
    • August trends were -3% (vs. a tough +36% comparison), slightly better than last month's -6%. But on a two-year basis, August is up about 35%.
    • Names seeing the most positive trends on that measure: Levi's (NYSE:LEVI) and Ralph Lauren (NYSE:RL), both of which are outperforming their subcategory.
    • Elsewhere, Wells Fargo's proprietary "buy-side barometer" measures buy-side sentiment for a set of retail/brand stocks, and since it last published rankings, a few stocks made significant moves higher: Foot Locker (NYSE:FL) jumped 13 spots to No. 15, and Designer Brands (NYSE:DBI) 12 spots to No. 20. TJX also saw a healthy gain, rising from No. 11 to No. 3 driven by strong performance on the sub-measures price performance and relative strength index. Moving the other direction on buy-side sentiment: RL slipped 13 spots to No. 30.
    • And "most loved" among buy-siders are Bath & Body Works (NYSE:BBWI) and Lululemon Athletica (NASDAQ:LULU) at No. 1 and No. 2, while the bottom spot is filled out (again) by The RealReal (NASDAQ:REAL).
    • Overall, its top picks in the space are the same: Capri Holdings (NYSE:CPRI), The Gap (NYSE:GPS), Victoria's Secret (NYSE:VSCO), Tapestry (NYSE:TPR) and Hanesbrands (NYSE:HBI).
    • Wolfe Research upgrades Apple (NASDAQ:AAPL) from Underperform to Peer Perform on strong iPhone 12 demand trends that should provide a tailwind for the iPhone 13 lineup expected to launch later this month.
    • Analyst Jeffrey Kvaal says the demand was driven by healthy U.S. operator promotions and Huawei share gains. Additional fuel is coming from the tech giant's supply chain strength, which partially offsets the global component shortage, and the "elevated" average selling prices.
    • The firm's supply chain checks show that Apple has "sufficiently elbowed aside" supply chain rivals to produce up to 90 million iPhone 13 handsets in the second half of the year, which is up from the 80 million iPhone 12 units produced in the same period last year.
    • Wolfe raises its fiscal year 2022 iPhone unit and average selling price estimates from 228 million and $824, respectively, to 232 million and $833.
    • Kvaal raises Apple's price target from $135 to $155.
    • Apple shares are up less than 1% pre-market to $152.46.
    • The company's three largest revenue generators are the iPhone, services and wearables. Services sales growth is currently threatened by lawmakers targeting the App Store commission rate. Wearables are a growing segment, but reports yesterday suggested the next-generation Watch Series 7 has run into production delays. 

  5. Covered ETFs/Emike – As RN says, they are a bad idea.  Horrible churning and fees in those things and yes, they look nice with all the leverage in a good market but QYLD fell from $20.46 to $14.72 in March, 2020 and now it's $23.03 so up $2.50 (10%) in 18 months really isn't all that impressive. 

    These are the holdings: 

    Name Symbol % Assets
    Apple Inc AAPL 11.41%
    Microsoft Corp MSFT 10.18% Inc AMZN 8.67%
    Facebook Inc A FB 4.17%
    Alphabet Inc Class C GOOG 4.07%
    Tesla Inc TSLA 4.05%
    NVIDIA Corp NVDA 3.80%
    Alphabet Inc A GOOGL 3.66%
    Ndx Us 07/16/21 C14100 N/A 3.65%
    PayPal Holdings Inc PYPL 2.61%

    In a market constantly going up, they are going to do well, of course but flat or down and they would be a disaster.   QYLD was at $25 in 2018 so RN's point that they've gone nowhere is valid but they do pay out about 10% a year so, if you are in it for the dividends, then great but we can do WAY better with simple covers like we use in our Dividend Portfolio.

    • Buy 1,000 shares of PFE at $45.62 ($45,620)
    • Sell 10 PFE June 2023 $45 calls at $5.75 ($5,750)
    • Sell 10 PFE June 2023 $40 puts at $4.25 ($4,250) 

    That's net $35,620 and, if called away at $45 (the current price), you make $9,380 and the dividend is $1,560 x 2 so $12,500 upside potential is 35% upside potential in less than two years and worst case is you own 2,000 shares at an average of $37.81, 20% below the current price (not including dividends collected).  So 35% upside flat or up and a 20% discount if the market falls.  That's a lot better than letting an ETF steal your money.

  6. Great thank you for the info RN & Phil!

  7. WTRH making a comeback:

    • WTRH – They finally stopped falling.  This was initially a net $1,500 credit so our worst case is owning 2,000 shares at $3.50 ($7,000) less the $1,500 is net $5,500 or $2.75/share.  That's our worst case and our losses are limited to that $5,500 – even if they go BK.  BUT, I see these guys signing up another fast food chain every week and I think they are just grinding it out in early stages so I'm not inclined to sell with a $3,900 loss when all we can do is lose $1,600 more.  HOWEVER – I'm also not inclined to spend more money – so we'll just give it another quarter and see how things progress.

  8. Phil I see you spooked yesterday my favorit!!!! down below 50 again!!!!!!

  9. Sorry Yodi, I know how many eggs you have in that basket…

    Webinar time!

  10. Phil/GOLD-

    I have a couple of positions that I need some advice about – one is GOLD – it is left over from previous spreads 

    I currently have 

    long 20 Jan 22 GOLD $17 calls @ 5.28 – currently 3.25  ( I rolled these down from $20 calls back in Feb 21)

    short 10 Jan 22 GOLD $25 calls @ 3.18 – currently 0.32 — (closed half of them on the prior big dip to try to wait for a re-entry that never came)


    I try to avoid the naked puts/calls when possible — should I take it off the table completely and enter one of the new spreads or wait for GOLD to bounce?


  11. Things are not improving into the close – just drifting into the NFP Report on Friday.

    Gold/Jeff – Greed kills, you had a nice, conservative spread and turned it into a risky one.  I'd sell 10 of the 2023 $20 calls at $2.85 to lock in your gains and then, when 2024 comes out, you can roll the longs to a 2024 spread and if GOLD is higher, you can do a 2x roll to 2024 short calls on the 10 you have.  

  12. Phil / UBS – I hae a short caller 'sept 17 that I. need to roll – looking to roll out to Feb Caller ====. Would you sell the '22 Feb $15 call (2.2 ) or the $17.5 Call ( .7) ?  Thanks,

  13. Phil / UBS – on the above – I'm on this I'm also looking for a short put for Feb put was holding out for a pull back – the %15 putter for about .7 or so…