In The Money with Fidelity Investments: SPX, XRT & LYFT

by Dan

On this week’s In The Money with Fidelity Investments, we discussed the volatility over the last week caused by the Fed’s Action and Inaction, highlighted some technical support and resistance levels for the S&P 500 (SPX) and offered two trade ideas for themes related to the “reopening” of the economy, one bullish and one bearish, watch by clicking below.

 

Here are my notes from the segment:

Macro: The Fed through its continued actions (this week saying they will buy corporate bonds, not just ETFs as previously stated) and last week’s commentary from chair Powell that rates will stay near zero until at least 2022 takes the worst-case scenarios at least for the balance of the year. Technical resistance between 3250 and 3400 and technical support between 2700 and 2850. given headwinds to growth, the uncertainty of coronavirus and vaccine and election, stocks likely stay in this range for the balance of 2020:

And will continue to be a great trading environment. And stories perceived to be very tied to the “reopening” of the economy theme will continue to be volatile. Some have discounted a very good scenario while others have not.

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Let’s start with one where I believe there is too much optimism and that is in U.S. retailers, I suspect that unemployment remains high, possibly as high as 10% for at least the rest of this year, pressures on wages remain, and unemployment benefits associated with financial assistance go away July 31st.

Trade Idea #1 Bearish XRT (retail etc), which is having some trouble at technical resistance:

 

Bearish Trade Idea: XRT ($42.60) Buy Sept 43 – 33 put spread for $3

-Buy to open 1 Sept 43 put for $4
-Sell to open 1 Sept 33 put at $1

Break-even on Sept expiration:
Profits of up to 7between 40 and 33, max profit of 7 below 33
Losses of up to 3 between 40 and 43 with max loss of 3 above 43

Rationale risks 6.5% of the stock price that breaks even down 6% and has gains of up to 17.5% if the etf is down 23% in 3 months.

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Some changes in the post-pandemic economy, pre-vaccine have likely not yet been realized. mass transit is going to be a sticking point for many employers to have their employees come to work, we could see some sort of employee incentives are programs set up with ride-hail like LYFT… I also think GOOGL should BUY LYFT, but that is a little pie in the sky, and not why I think long exposure makes sense.

Trade Idea #2 Bullish on LYFT

Bullish Trade Idea: LYFT ($36) Buy Aug 40 – 50 Call spread for $2

-Buy to open 1 Aug 40 call for 3.00
-Sell to open 1 Aug 50 call at 1.00

Break-even on Aug expiration:
Profits of up 8 between 42 and 50 with max gain above 50
Losses of up to 2 between 42 and 40 with max loss of 2 below 40

Rationale: this trade idea risks 6% of the stock price with a break-even up 15%, not a fantastic risk-reward, but the stock is down 15% on the year, and if it gets going in the right direction into their Q2 results expected in early Aug I suspect that’s where the stock will be making a be-line for, being unchanged.

The chart of LYFT is also fairly interesting, seemingly at an inflection point: