Risk Reversal - In The Money

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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:

Risk Reversal - In The Money Player


Here are my notes from today’s show:

Macro: The stock market is trying to find its footing in the face of 40 year high readings on inflation, the Fed squarely focused on comparing it and valuations having reset after a period of unchecked optimism about innovation and frankly a disregard by many investors of historical norms.

The S&P 500 (SPX) after dropping 10% from its recent all-time highs has recaptured half of it losses, but at an important spot on the charts.

I’d also add that yields on the 10-year are nearing an important technical spot of 2%, I would be surprised if they rip through technical resistance, which is why Thursday’s CPI reading is of focus for so many market participants.

Trade Idea #1: Blackstone (BX) too far too fast? The stock was a rocket ship last year benefitting from an active capital markets environment and still very low rates. Both conditions might be very different this year, and the stock chart appears to be a “head and shoulders” top formation. I want to play for a move back towards the neckline just above the recent lows between $100 and $110:

Bearish Trade Idea: BX ($132.50) Buy March 130 – 110 Put spread for $4

-Buy to open 1 March 130 put for $5

-Sell to open 1 March 110 put at $1

Break-even on March expiration:

Profits of up to 16 between 126 and 110 with max gain of 16 at 110 or lower

Losses of up to 4 between 126 and 130 with a max loss of 4 above 130

Rationale: this trade idea risks 3% of the stock price, has a break-even down about 5% and has a max potential gain of 12% if the stock is back near the recent lows, down about 17% in a little more than a month.

Trade Idea #2: Long Ford (F) a month ago when Ford was above $24 I was thinking to fade it. Now with the stock at its 2-year uptrend, I think you play for a bounce. down 30% in a month!

Bullish Trade Idea: Ford ($18.10) Buy March 18 call for $1.15

Break-even on March expiration:

Profits above 19.15, up 6%

This trade idea risks about 5% of the stock price, stopping the bullish view below what is clearly important long-term technical support.

Lookback – A couple of weeks ago I detailed a near-term bullish view on BAC:

BAC ($46.30) Buy Feb 48 – 50 call spread for 50 cents

Now with the stock up about $3, the $2 wide call spread is near the short strike of the spread with a little more than a week to expiration, it makes sense to book the profit. the spread that cost 50 cents is now worth $1.20 with the stock at $49.30