In The Money with Fidelity Investments: SPX, UPS, XLV, MSFT

by Dan

Shortly after the open today, I filmed my weekly In The Money segment with Fidelity Investments. Click below to watch and see my notes below the video:

 

Show Notes:

Macro: Despite the Fiscal Aid plan announced this week, it might be too little too late as the benefits pale in comparison to what many citizens and small business got in the spring and the 4-month lag since many benefits have expired has taken its toll as millions of Americans remain out of work, may face eviction… consumer confidence is lagging, household balance sheets are depleted, jobless claims are rising and job gains are coming down hard… just as new lockdowns are going in place as c19 is raging.  BUT VACCINES, we hope availability, distribution, and acceptance are high. if not we could face a double-dip recession. I want to be optimistic that things will be near normal by summer but I fear that is PRICED in to markets here… an early 2021 scare in markets might be the best thing for bulls to shake out some weak hands… here are the levels in SPX to watch.

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Trade Idea #1: Bearish UPS ($175) 

Stock is discounting a great holiday quarter and vaccine delivery. consumer confidence is waning despite the new fiscal stimulus bill, if Dems don’t win the two seats in GA runoff that might be it sadly for fiscal stimulus. jobs growth has slowed and claims have gone up. UPS will see a downshift in demand as lockdowns continue across the U.S> and then we slowly start to reopen in spring-summer when the population nears herd immunity.

 

Bearish Trade Idea: UPS ($175) Buy Feb $175 – 145 put spread for $8

-Buy to open 1 Feb 175 put for $9.50

-Sell to open 1 Feb 145 put at $1.50

Break-even on Feb expiration:

Profits of up to 22 between 167 and 145 with max gain of 22 below 145

Losses of up to 8 between 167 and 175 with max loss of 8 above 175

Rationale: this trade idea risks 4.5% of the stock price, has a break-even down 5.5% and profits of up to 13% of the stock price if it is down 17% in two months.

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Trade Idea #2: Bullish XLV ($112) S&P Healthcare etf

PFE & JNJ two of its largest holdings will be selling hundreds of millions of doses of their c19 vaccine in 2021… this should put upward pressure on the space…

The stock has near-term support at $110, very health support down 10% at its Sept-Oct double bottom low.

 

Traders might consider risk reversals, selling a downside put to finance the purchase of an upside call. Here is the kicker, selling a naked put means that if the stock is at or below that level on expiration, then you would be put 100 shares per 1 contract long and suffer losses below. But that is far more attractive than buying the etf at current levels and suffering losses the whole way down if you are wrong on the direction.

Trade Idea: XLV ($112) Buy Feb 106 – 116 Risk Reversal for even

-Sell to open 1 Feb 106 put at $1.60

-Buy to open 1 Feb 116 call for $1.60

Break-even on Feb expiration:

Profits above 116, up 3.5%

No loss of gain between 116 and 106, worst-case scenario put 100 shares per 1 contract short and loses below 106, down 6% from current levels.

This position will show losses on a mark to market basis as the etf moves lower close to the short put strike and gains as it moves closer to the long call strike.

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Lookback: Nearly 3 weeks ago on Dec 2nd, I detailed a bullish trade idea in MSFT, playing for a breakout to new highs…

MSFT ($213) BUY JAN 220 – 240 CALL SPREAD FOR $4.25

Now the stock is $224 this call spread is worth about $7, up $2.75 or 65%…. so now what to do?