Welcome back!
It’s a nice, short week and we get another day off next Monday so all is well and the volumes are low, so it’s a good time to push the market a bit higher but we’ll have to see what sticks next week. Today we’ll see if “THEY” can even get the S&P back over the 50-day moving average at 3,886 – it’s trending up, so it shouldn’t be too much resistance.
Will anything be enough to get us to our predicted 4,000 line for the last day of 2022? It really doesn’t matter – it’s not like we needed 4,000 on the button to make our bones for the year – we already cashed out and the market is right where we expected it to be – so on we go to 2023.
As we expected, Covid has become a huge issue in China but they stopped reporting numbers and rumors are anywhere from 50M to 350M people have been infected in the past month. At the moment, US numbers are holding steady at 66,000 infections per day (24M/year) and “only” 426 deaths per day (155,490/year), which is only as many Americans as died during the entire Vietnam war every 6 months – so why worry about that?
One effect we are seeing here is Tesla’s (TSLA) stock is dropping today because their Shanghai plant is extending production cuts into next year due to the Covid emergency. At the moment, the plant is completely shut down. Shanghai makes about 1/3 of all Teslas (3s and Ys) in the World.
$117 pre-market is down to $368Bn from $1,300,000,000,000 last Christmas – so it’s been a bad year for Elon and company. The real problem is they never should have been at $1.3Tn and, even at $368Bn, the company “only” made $13Bn in 2022 so it’s STILL trading at 28x earnings but they projected $19Bn for next year, which would be a forgivable 19 times earnings but producing ZERO cars in Shanghai for a month will cost them $1Bn.
On the other hand, TSLA has $17.5Bn net of debt in the bank – that’s a huge plus, so they are getting into the zone where they may be playable. This morning you should be able to sell the 2025 $50 puts for $10 and that would net you into the stock for net $40 and even Elon Musk shouldn’t be able to screw things up that badly – right?
Let’s say we sold 10 short TSLA 2025 $50 puts (obligating us to own 1,000 shares at $50) for $10,000 and bought 20 of the 2025 $50 ($80)/80 ($63) bull call spreads for net $17 ($34,000). That would be net $24,000 on the $60,000 spread that is 150% in the money to start. If TSLA stays over $80, you make $36,000 (150%).
That is the first bullish play I’ve picked for TSLA since they were about $50! Although I just filled up my tank this weekend at $2.85/gallon, Gasoline (/RB) priced shot back up to $2.40 over the weekend though with all the snow and grounded flights, I think it should pull back again. Oil (/CL) is $80 this morning and also a fun short with very tight stops above that line.
We’re still long on Natural Gas (/NG), which is hanging around $5.15 this morning. The cold snap has mainly gone away but the intensity of the cold is likely to lead to a major draw-down in this week’s report.
Speaking of reports, it’s a pretty dull data week with NO Fed speeches scheduled:
And there are no significant Earnings Reports this week either. We really should be on vacation and I was going to be but I dithered about taking a cruise this week as I was worried about Covid and I waited too long and missed my chance. Now I’m sorry I missed it as, historically, it is such a slow week.
Market moves this week are not to be taken seriously.
Good morning Phil,
Here’s a question that might give you something to do for a few during this slow week. 😉 Last week, I was assigned 200 shares of WBA. The remaining position based on the butterfly portfolio is:
WBA Apr 21 2023 40.0 Call -1
WBA Jan 17 2025 30.0 Call 5
WBA Jan 17 2025 35.0 Put -1
WBA Jan 17 2025 45.0 Call -4
Should I just sell 2 more $40 or $45 calls and possibly 1 $35 put or would you have a better suggestion?
TIA
brucethenet, Question why would you sell naked calls, as over 5 they naked and well if you like that great stock, with a yield of 5% than by all means sell same puts. 😡
Thanks yodi, the way I was thinking is the 2 more short calls are covered by the 200 shares I was assigned. The 2 puts assigned were WBA Jan 20 2023 45.0 Put, not the WBA Jan 17 2025 35.0 Puts. 😊
That makes sence
My logic is you have a $1,500 spread x 5 or x 10 covering the extra 1 or 2 short calls so, even at $50, you would be down $2,000 out of $15,000 and roughly an $11,000 gain – I just don’t consider that too risky – even against the slim possibility they get bought and you don’t have a chance to roll – certainly not compared to the 8 x $400 ($3,200) you’ll be collecting over 2 years selling short calls.
WBA pays a 5% dividend, so it doesn’t suck to own them. Still, what’s the purpose of the trade? In the Butterfly Portfolio, our goal is to make money selling short puts and calls. You sold April $40 calls and the stock is not at $40 so that’s on track and your long position is the 2025 $30/45 bull call spread with short $35 puts – and that is on track.
Short April $40 calls are $2
The 2025 $30s are $11 and the $45s are $4.25 and you have one extra long (and the stock)
The 2025 $35 puts are $5.25
So your long spread is net $3,275 and you have $7,400 worth of stock and you sold $200 worth of short calls. If you just had the spread, that would be fine.
So I’d certainly cash out the stock. You can just sell it or sell 2 April $35 calls for $4.85 and that’s like getting $39.85 if you are called away or lowering your basis 15% if not. Drop your basis by 15% every 3 months and you have free stock by the middle of next year! If you get called away, you make $1.60, which is 4% in 3 months – not terrible.
Or you could cash out now and double your spread, giving you 2 extra longs and still putting $4,125 in your pocket. Then you have a $6,550 long investment and you can sell 3 more April $40 calls for $2 ($600) and you will have collected 10% for 3 months with 7 more quarters (70%) left to collect going forward.
Since you have 2 extra longs, it’s hard for the short calls to hurt you and you can always roll things along.
Thanks Phil, can you do the dummies version of the second cash out option? 🤔 Not sure I understand doubling the spread and having 2 extra longs and how it’s better than the first option except that 10% for 3 months is better than 4% in 3 months. Thanks again in advance, B
Well that’s it, isn’t it, less cash out of pocket and 3x the returns. You can not double up and just do the whole thing with 5 longs, 4 short (2025) but I’d sell 2 of the short-term calls and not one for $400/qtr vs $200/qtr.
Good morning!
Yes there’s been some news but not much exciting:
Will 2023 Be “Just An Average Recession In An Average Year” Or Will It Be Transformational?
Good Morning.
Dithering – One of the worst mistakes a Senior can make…
Take the next boat, Phil! 🙂
Yeah, dithering is for old people!
Yeah!
Oops, so much for that rally!
Phil – Just got assigned 1,000 SPWR for net $19. Planning on closing this out and replacing with the 2025 15-25 call spread for 3.xx? the mid of the spread is 3.1, but I don’t think it is that likely.
I know last week you were looking for 2.5 for the 15-25 spread or 1.8 for the 20-30 spread, but with assigned shares, should I be selling the shares and waiting for a future drop?
SPWR is at $17.85 and you are in at net $19. You can sell the March $18 calls for $2.40 and that’s $20.40 so you make $1.40 instead of losing $1.15 if you sell now. That’s $2.55 (13.4%) better in 80 days – makes sense to me.
While you wait, you can use that $2.55 to buy the spread that will replace the calls.
Hope everyone had a wonderful weekend!
Phil, any thoughts on China’s opening can dropping of Covid Zero as a economic threat to US because they can cause more global inflation with their re-opening?
I think it’s more likely China ends up shutting down again for most of Q1 but Q2 might get interesting with inflation.
Well the Dow came back but not so much the rest.
3,840 held – that’s good.
LUV does anyone know what the fundamental issue is that is crippling its operations vs the other airlines? Playable?
From the 10x Travel Group
My friend’s husband is a pilot with Southwest. He just posted this an hour ago. I’m not including his name or the photos he shared of packed SWA employee rooms at the airports over the past couple of days (in case his post comes back to bite him with the company—even though he’s stating facts.) He also posted a screenshot of a fellow pilot on hold with SWA Scheduling for over 22 hours. Anyway, here’s some insight for those wondering if this massive round of SWA cancellations is really all due to weather and staffing issues.
“I don’t know what to say. Southwest Airlines has imploded. Their antiquated software system has completely fried. Planes are parked. Crews are stranded in the airports with the passengers, volunteering to take the passengers in the parked planes but the software won’t accept it. Phone lines are overwhelmed for both passenger and crews. I personally spent over two hours trying to get ahold of anyone in the company last night after midnight. A Captain and I did manage to get the one flight put together on Christmas night and got people home. Kudos to the ops agent and dispatcher for making it happen. We had to manually input a lot of the data and it took over an hour to coordinate with dispatch going back and forth running numbers.
We spent hours trying to get the company to answer and get us a hotel when we landed as they’re all sold out. We were only put in a call que for hours before hanging up. I found one hotel with 4 rooms and we bought our own rooms at 2:30am. I even paid for a Flight Attendants room. We literally have crews sleeping on the airport floors all over the country with nowhere to go. Crews have been calling to fly anyone, anywhere, but the company says the system needs a reset. They have effectively shut down the operations for the rest of year, running 1/3 of the flights so that they can let the computer find and locate the crews and aircraft. Gate agents are in tears. They’ve been yelled at, cussed at, slapped and spit on. Flight attendants have been taking a beating. The frontline employees have had little support or communication. Terminals are standing room only with people having been there for days. Pilot lounges are packed with pilots ready to fly and nowhere to go.
Embarrassing is an understatement. I’m going on my second of three days off, still stuck on the east coast and still expected to show up in the morning with no schedule. And I’m willing to fly all day if needed. Because that’s nothing compared to the passengers needing meds in bags that are lost and mothers traveling with kids, having been stuck for the same amount of days in the terminal. In 24 years, I’ve never seen anything like this. Heads need to roll! Rumors on media are floating that there is a lack of crews and pilots are staging sick calls. Absolutely not true at all. This is a computer system meltdown. Thousands of crew members are sitting in hotels and airports with nowhere to go. This airline has failed miserably.”
Wow!
Southwest did a major expansion in the last few years and spread themselves far too thin. They also don’t fly back and forth patterns to hubs like most airlines – they have a lot of zig-zag flights for crews, which make it harder to replace people who miss a leg along the way.
8,000 of the 12,000 flights cancelled this weekend were LUV (others were mostly late) and 60% of today’s schedule was cancelled too – they are still not back to normal.
We’re not going to get much more than that from them as there’s now a DOT investigation so they’ll lawyer up and won’t be able to provide clarity until the investigation is clear.
https://charts2.finviz.com/chart.ashx?t=luv%20\&p=w&s=y
At $34 they should join our watch list. $30 should hold and that’s 10x earnings ($20Bn market cap) though earnings will be impacted by this mess.
From the 10x Travel Group
My friend’s husband is a pilot with Southwest. He just posted this an hour ago. I’m not including his name or the photos he shared of packed SWA employee rooms at the airports over the past couple of days (in case his post comes back to bite him with the company—even though he’s stating facts.) He also posted a screenshot of a fellow pilot on hold with SWA Scheduling for over 22 hours. Anyway, here’s some insight for those wondering if this massive round of SWA cancellations is really all due to weather and staffing issues.
“I don’t know what to say. Southwest Airlines has imploded. Their antiquated software system has completely fried. Planes are parked. Crews are stranded in the airports with the passengers, volunteering to take the passengers in the parked planes but the software won’t accept it. Phone lines are overwhelmed for both passenger and crews. I personally spent over two hours trying to get ahold of anyone in the company last night after midnight. A Captain and I did manage to get the one flight put together on Christmas night and got people home. Kudos to the ops agent and dispatcher for making it happen. We had to manually input a lot of the data and it took over an hour to coordinate with dispatch going back and forth running numbers.
We spent hours trying to get the company to answer and get us a hotel when we landed as they’re all sold out. We were only put in a call que for hours before hanging up. I found one hotel with 4 rooms and we bought our own rooms at 2:30am. I even paid for a Flight Attendants room. We literally have crews sleeping on the airport floors all over the country with nowhere to go. Crews have been calling to fly anyone, anywhere, but the company says the system needs a reset. They have effectively shut down the operations for the rest of year, running 1/3 of the flights so that they can let the computer find and locate the crews and aircraft. Gate agents are in tears. They’ve been yelled at, cussed at, slapped and spit on. Flight attendants have been taking a beating. The frontline employees have had little support or communication. Terminals are standing room only with people having been there for days. Pilot lounges are packed with pilots ready to fly and nowhere to go.
Embarrassing is an understatement. I’m going on my second of three days off, still stuck on the east coast and still expected to show up in the morning with no schedule. And I’m willing to fly all day if needed. Because that’s nothing compared to the passengers needing meds in bags that are lost and mothers traveling with kids, having been stuck for the same amount of days in the terminal. In 24 years, I’ve never seen anything like this. Heads need to roll! Rumors on media are floating that there is a lack of crews and pilots are staging sick calls. Absolutely not true at all. This is a computer system meltdown. Thousands of crew members are sitting in hotels and airports with nowhere to go. This airline has failed miserably.”
Thoughts On Owning the Libs
Watching Musk’s ongoing antics, it has become very clear to me that his actions are not only destroying Twitter, but the collateral damage is taking Tesla down with it – a veritable twofer of ineptitude and rake-stepping.
Let’s have a look at some numbers:
The state of NY maintains a great catalog of data that can be found here. Drill down a bit and we get to Vehicle, Snowmobile, and Boat Registrations. Filtering, we learn that there are ~48,795 Teslas registered in the state. We’ll do some further work on that in a bit, but let’s put it aside for now.
The state of NY (obviously) also keeps records of election results. One such page can be found here.
Do you see where this is going?
My thesis is that in Musk’s newfound desire to own the Libs, he’s alienating the very people who have overwhelmingly been buyers of his EVs. How to validate this thesis? Well, let’s look at data for the state of New York from three distinct datasets: Census Bureau gives us population by county, the state gives us a breakdown of 2020 election results (see above), and another state database gives us (as but one of a truly impressive catalog) vehicle registrations (again, see above).
Now THAT is the way to look at data!
• Stocks Could Return About 10% in 2023—But First, They’re Going to Fall: After a selloff in the year’s first half, equities could rebound as investors anticipate a return to economic growth, market strategists say. (Barron’s) but see Forget Stock Predictions for Next Year. Focus on the Next Decade. Wall Street’s market forecasts for 2023 are worthless, our columnist says. But the long view is much clearer. (New York Times)
• Why This Housing Downturn Isn’t Like the Last One: A postcrisis mortgage-market makeover and an overhaul of the financial system make a repeat of 2008 unlikely (Wall Street Journal).
• How Long Will It Take Inflation to Hit the Fed’s 2% Target? If they are serious about that 2% inflation target, history says it might not be as easy as they think. Over the past 90+ years, the average inflation rate in the United States has been a little more than 3% per year, (Wealth of Common Sense)
• Institutional Failure: A Future of Finance Worldview: Part of the reason memes have a special place in my heart is that it seems like a daily occurrence that something dramatic, important, and problematic sits right in front of me and honestly, I’ve just sort of learned to live with it. Pandemic? Economics? Politics? Climate? AI? Clean Water? War in Ukraine? Violence? Civil rights? Rule of law? Whatever. (ETF Trends)
• Trading Games: This week the SEC filed suit against eight financial influencers from Atlas Trading, an online stock picking community, for manipulating their social media followers into buying and selling stocks for their own personal gain. The suit explains how their scheme worked. (Of Dollars And Data)
• An EV Buying Guide for People Fed Up With Tesla’s Elon Musk: Luxury brands from Mercedes to Porsche have options that are superior to the EV trailblazer. (Pursuits)
• January 6 Report Presents a Devastating Case Against Trump: He was the “central cause” of the riot and mounted multiple plots to overthrow democracy. (Mother Jones)
• The Meadows Texts: A Plot To Overturn An American Election: TPM Has Obtained Explosive Evidence Uncovered By The January 6 Select Committee. (Talking Points Memo)
• The Fed Is Making a Mistake—and the Stock Market Will Pay the Price: The central bank raised interest rates by half a point and promised to hold rates higher for longer. That could be a problem. (Barron’s)
• The Corruption of Supreme Court Conservatives: The Court’s falling approval is worsened by conservative Justices’ blatant partisanship. Many of its decisions are untethered from any form of recognizable jurisprudence, and the contempt of conservative Justices for precedent is incomprehensible. The collapse of public approval for the Court – dismissed in arrogance by people like Justices John Roberts and Samuel Alito – has nothing to do with disagreeing with “objective” decisions. Rather, it is a wide recognition that justices like Alito and Clarence Thomas consider themselves no different than lifetime senators, and don’t even bother to hide it. (The Threats Within)