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Risk Reversal - In The Money Sponsored by Fidelity


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: Friday’s June job’s report will be very instructive to the Fed’s likely course of action for the balance of the summer. If we get a third consecutive weak reading, despite some hot readings on inflation, including housing prices, wage growth, and consumer confidence, the Fed will have cover to stick to their dovish message past the late July FOMC meeting and likely into the Kansas City Fed’s annual symposium in Jackson Hole the last week of August. This will be supportive of lower bond yields, with the 10-year possibly retracting back to its 200-day moving average, lending credence to the recent rotation back into growth and out of GDP exposed cyclical and financials which had benefited while rates were rising in Q4 2020 and Q1 2021.

Trade Idea #1: Long AT&T (T)

If rates are headed lower over the summer, investors may look to high-yielding stocks like AT&T, which currently sports a 7.2% annual dividend. The company recently announced its intent to spinout its media assets in an effort to pay down debt, reversing a massive buying spree over the last decade that included DirecTV and Time Warner. Initially, investors liked the idea, and the stock traded as high as $34 before it reversed and has barely seen an uptick in a month. $27.50 looks like decent near-term support, but I am not sure I would want to be long the stock below, which leads me to define my risk with calls or call spreads to play for a bounce-back for gap fill to $32.

Bullish Trade Idea: T ($28.65) Buy Aug 29 – 31 call spread for 35 cents

-Buy to open 1 Aug 29 call for 48 cents

-Sell to open 1 Aug 31 call at 13 cents

Break-even on Aug expiration:

Profits of up to 1.65 between 29.35 and 31 with a max gain of 1.65 above 31

Losses of up to 35 cents between 29 and 29.35 with a max loss of 35 cents below 29

Rationale: this trade idea risks 1.2% of the stock price, breaks even up 2.4%, and has a max gain of nearly 6% of the stock price if it is up 8% in a little less than 2 months. Put another way, of the stock is up 10% on Aug expiration this trade will be worth nearly 5x the premium at risk.

Trade Idea #2: Lululemon (LULU)

Last week shares of Nike (NKE) rocketed to a new all-time high in one fell swoosh… gapping up 15% on Friday following better than expected earnings and guidance. For those trying to extrapolate to athleisure peer Lululemon (LULU), I might consider taking a mulligan. Many of the trends that NKE’s results benefitted from are not exactly what LULU might be facing as the world reopens.

Shares of LULU trade about 45x next year’s expected 23% eps growth on 17% sales growth which is about 10 turns rich to NKE.

From a technical perspective, the stock is at an important sport, the downtrend from its all-time highs made last summer.

Bearish Trade Idea:  LULU ($365) Buy Aug 360 – 320 put spread for $10

-Buy to open 1 Aug 360 put for 12

-Sell to open 1 Aug 320 put at 2

Break-even on Aug expiration:

Profits of up to 30 between 350 and 320 with a max gain of 30 below 320

Losses of up to 10 between 350 and 360 with a max loss of 10 above 360

Rationale: this trade idea risks 2.7% of the stock price, breaks even down 4%, and has a max gain of up to 8% of the stock price if it is down 12% in a little less than 2 months. Risking one-quarter the width of the spread and targeting a move back to its 200-day moving average.

Lookback: Last week I detailed a bullish trade idea in COIN as a way to play for a near-term bottom in Bitcoin…

Bullish Trade Idea: COIN (~$228) Buy July 250 call for $4

Well, Bitcoin did find some support and rallied 20% from last week’s lows. Shares of COIN have also bounced 20%, and the long call idea from last week has appreciated nicely. With the stock near $250, the now in-the-money call is now worth almost $10.50, it makes sense to take the profit and possibly roll some of the profit up and out playing for further gains.