Yesterday I got “In the Money” again with my friends from Fidelity Investments, we took a look at Microsoft and Facebook into their Q4 earnings both out today after the close, and talked a little macro, the effects of the coronavirus on market sentiment.
— Dan Nathan (@RiskReversal) January 28, 2020
On the Macro, we discussed how the coronavirus has the potential to be the epitome of a “black swan” event, something no one saw coming, impossible to quantify its duration, human and economic toll.
I had a quick touch on the sorts of assets that go up in times of economic and global macro uncertainty… of course U.S. treasuries, and the chart of the TLT breaking out of this wedge is fairly powerful, especially when you consider that the Fed Chair at his presser today is likely to get questions on what the spread of this virus and the lockdown of tens of millions of people and business activity means for their rate outlook. I suspect it keeps the Fed accommodative for longer… thus keeping downward pressure on yields (see my TLT idea from last week here and late last year here):
Then we moved on to Tech earnings…
MSFT reports fiscal Q2 results Wednesday after the close…
Implied move about 4% or $6.50 vs avg 4qtr move of 2%.
MSFT trades 30x expected 2020 eps and sales growth of about 12%. Stock up 60% in last year, getting a tad extended, both valuation and price on the chart…
Strategy: Holders of the stock might consider defensive strategies, for risk management purposes, into a potentially volatile event and an uncertain macro environment, stock replacement, selling your long stock and buying call
Back in August when MSFT had been in this months-long consolidation between 130 and 140 I highlighted the potential for a solid trade set up for a breakout into their earnings in Oct (read here), and I suspect given the fact that once it broke it barely had a downtick for months, until Monday. If you were in MSFT for a trade, but think things might have gone too far too fast, it might make sense to replace long stock with calls as there appears to be downside risk to the uptrend near $150 vs owning a call where you would just be risking the premium paid.
Trade Idea #1:
MSFT at $164, sell to close long stock
Buy to open call March 165 for $5
Break-even on March expiration at $170, up 3%, that is you max risk
Max loss is 5 between 165 and 170
Max gain unlimited after 170
Trade Idea #2:
Facebook (FB) reports wed after the close.
The implied move almost 5%, or $12 avg 4 qtr move about 5%.
Short-dated options prices are elevated into earnings.
The stock just made a new all-time high, but for now, has failed
Long holders of the stock might consider OVERWRITING THEIR stock, targeting the implied move… this strategy means Selling 1 out of the money call vs 100 shares of stock, to take advantage of elevated options premiums, especially if you think the stock could be the rangebound near term.
Disclaimer, this idea was written on Monday when stock was $214, if you were looking to overwrite today before earnings the stock has had a sharp snapback and is trading $221 as I write, so if the implied move was $12 you would want to adjust the short call strike higher, possibly selling the $232.50 or the $235…
FB vs 100 shares long at 214
Sell to open 1 Feb 225 call at $3.50. (1.5% of stock price over next 3 weeks) call away up nearly 7%
Break-even on Feb expiration:
Profits of the stock up to 228.50, in line with the implied move, stock called away at 225, but really 228.50 up 3.50, if you add in the premium, received, up 7% in less than a month.
Call sale creates a small buffer to the downside…