Yesterday shortly after the open I filmed my weekly In The Money segment with Fidelity Investments where we discussed current macro headwinds vs the backdrop of narrowing breadth in the broad market. While earnings expectations for the companies/industries hardest hit by the COVID-induced recession are very low, expectations for the Nasdaq leadership are very high as a result of the outsized performance of the stocks.
I detail a hedge in the Nasdaq 100 (QQQ etf) looking out to October expiration and use tomorrow’s upcoming earnings in American Express (AXP) to explain how to use weekly at the money straddle’s to determine the implied move for earnings and look-back on how a collar would have played out for holders of Netflix (NFLX) into and out of last week’s print.
Here are my notes from the segment:
Macro: earnings are starting to roll in, last week Banks were a mixed bag, but as we discussed, the sentiment was really poor in the group, and the underperformance of the stocks was obvious. this week we get earnings from some big Nasdaq winners and investor reactions will be very important and could set the stage for some downward volatility given some macro headwinds… first does not look like Congress will pass another aid bill before expanded unemployment benefits run out at end of month, tensions with China are heating up which means trade deal could be reversed and China could retaliate against our tech cos.
Lastly, the breadth in the market is getting very narrow, the major tech names are doing all of the heavy-lifting, history shows that can be a dangerous setup…
Trade Idea #1: QQQ Portfolio Hedge…
-Nasdaq 100 – 4 stocks make up 40% of the weight or almost $6 trillion in market cap
Up on Year: AAPL +32%, AMZN +70%, MSFT +32%, GOOGL +16%
QQQ ($265.50) buy Oct 260 – 200 put spread paying $10
-Buy to open 1 Oct 260 put for 12
-Sell to open 1 Oct 200 put at 2
Break-even on Oct exportation:
Profits of up to 50 between 250 and 200 with max gain of 50 at 200 or lower
Losses of up to 10 between 250 and 260 with max loss of 10 above 260
Rationale: this trade risks less than 4% of the etf price, breaks-even down 5.5% and has a max potential gain 19% if the QQQ is down 24% on Oct expiration, or basically back to flat on the year…
IMPLIED EARNINGS MOVE:
Calculation: we take the at the money (closest strikes to the stock price) Straddle (the call premium + the put premium) in the weekly expiration (July 24th) and divide by the stock price.
atm weekly straddle divided by the strike price gives you implied weekly move.
AXP, July 24th 96 call at $2.40 + July 24th 96 put $2.20 = $4.60
$4.60 / 96 = 4.8% the one day implied earnings move… the stock has moved about 2% over the last four quarters.
Lookback: Last week I detailed a hedge for long holders of NFLX into its earnings event:
Vs 100 shares NFLX at $525, Buy the July 475 – 600 collar for even
-Sell to open 1 July 600 call at $7
-Buy to open 1 July 475 put for $7
Break-even on July (this Friday expiration):
Profits of stock up to 600, called away there, up 14%
Losses of stock down to $475, protected below.
Immediately after the company reported disappointing results the stock plunged more than 10% in the after-hours but then recovered, and has settled in around 490. The hedge expired worthless, it cost nothing
but offered protection below a certain point that might have come in handy…