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:
Macro: With the S&P 500 (SPX) set to close very near an all-time high, up 15% on the year, it makes sense for investors to consider the potential drivers for further gains in 2021. Consensus calls for a 14% drop in EPS for the SPX in 2020 and a 22% gain in 2021 to a new peak.
At current levels, the SPX trades at 22x forward earnings, well above its 10-year average of 15.5x. Lots of things have to go right for SPX earnings to make a new high in 2021, the least of which seeing an end to the pandemic.
It’s worth noting that the VIX, the S&P Volatility Index has found some support over the last couple of weeks at its Feb 2020 breakout level near 20:
Possibly investors seeking protection into next week’s Senate runoff in GA which will determine the fate of the senate and possibly the agenda of the incoming Biden administration… more or less fiscal stimulus, regulation, and taxes.
Year-end is a good time to take stock of your portfolio and look for areas to trim where there has been overexuberance and add where you think there has been underappreciation.
Trade Idea #1: Bullish KO, the companies operations were severely impacted by the pandemic with earnings and sales expected to drop 10% in 2020 and rebound by a similar amount in 2021. As we get through the winter and shutdowns abate at the same time that we see a massive ramp in vaccine distribution, stocks like KO that have not to date fully recovered could be making new highs.
KO is down 2% on the year and down about 11% from its 52-week and all-time highs made last Feb.
KO looks poised to break out of its recent consolidation and makes a run for the Feb highs:
Bullish Trade Idea: KO ($54.40) Buy Feb 55 – 60 call spread for $1.30
-Buy to open 1 Feb 55 call for 1.60
-Sell to open 1 Feb 60 call at 30 cents
Break-even on Feb expiration:
Profits of up to 3.70 between 56.30 and 60 with max gain of 3.70 at 60 or higher
Losses of up to 1.30 between 55 and 56.30 with a max loss of 1.30 below 55
Trade Rationale: this trade idea risks 2.4% of the stock price, has a break-even up 3.5%, and a max gain of nearly 3x the premium at risk if the stock is up ~10% in two months, back at its Feb 2020 highs one year later.
Trade Idea #2: CRWD a cybersecurity stock that has benefitted from increased online usage in work and school from home during covid, but also of late from the massive Solar Winds hack. CRWD is up 300% on the year, up 540% from its March lows, sporting a $45 billion market cap, 53x expected 2020 sales, and 38x expected 2022 sales, growing 40%.
If investors are waiting for the new year to take profits in high fliers like CRWD, this one has a lot of room down to its late Nov breakout near $155:
Bearish Trade Idea: CRWD ($208) Buy Jan 200 put for $8
Break-even on Jan expiration:
Profits below 192
Losses of up to 8 between 192 and 200 with a max loss of 8 above 200
Rationale: this trade idea risks 4% of the stock price with a break-even down 7%
I would look to spread this by selling a lower strike put if the stock were to drop below the long put strike.
I would look to cut my losses if the stock does not drop using a 50% premium stop of what I paid for the put.
Lookback: Last week I detailed a bearish trade idea in UPS:
UPS ($175) Buy Feb $175 – 145 put spread for $8
Now with the stock near $168 the put spread is worth about $11… as this goes deeper in the money, possibly nearing a double of the original premium spent it might make sense to roll this bearish view down.