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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: Persistent inflation, rising interest rates, and disrupted supply chains have been the root of much of the stock market volatility this year, the result of the crisis policies to combat the pandemic. Despite China’s zero-tolerance covid policy, the rest of the world seems more focused on what comes next, and stock market investors, in particular, will be forced to consider all of the above as we enter Q1 earnings season, because for the next few weeks corporate guidance or lack thereof will likely drive much of the price action and cause investors to rethink valuations, which stock’s or groups have discounted higher rates, higher prices, possibly less growth, and which have yet to.


Trade Idea #1: Consumer Staple stocks, as measured by the XLP etf have benefited from investors seeking the perceived safety in companies that should whether an economic slowdown is better than discretionary stocks. The etf led by gains in large components PG, COST & KO might see some of these components have murky near-term guidance which could cause a checkback to the ETF’s 200-day moving average and breakout level from Dec near $73:

Bearish Trade Idea: XLP ($78.50) Buy May 78 – 73 put spread for ~$1

-Buy to open 1 May 78 put for $1.40

-Sell to open 1 May 73 put at 40 cents

Break-even on May expiration:

Profits of up to 4 between 77 and 73 with a max gain of 4 below 73

Losses of up to 1 between 77 and 78 with a max loss of 1 above 78

Rationale: this trade idea risks less than 2% of the etf price, breaks even down a little more than 2%, and has a max potential gain of 4x the premium at risk if the etf is down 7% in a little more than a month.


Trade Idea #2: If you think that large-cap tech is likely to be the last shoe to drop then consider a defined risk way to play for new lows in the group during earnings season via the XLK 

Bearish Trade Idea: XLK $148.50 Buy May 148 – 130 put spread for $4

-Buy to open 1 May 148 put for $5

-Sell to open 1 May 130 put at $1

Break-even on May expiration:

Profits of up to 14 between 144 and 130 with a max gain of 14 at 130 or below

Losses of up to 4 between 144 and 148 with max loss above 148

Rationale, this trade idea risks 2.7% of the etf price, has a break-even down of about 3%, and has a max potential gain of more than 3x the premium at risk down 12% in a little more than a month.


Lookback – On March 2nd detailed a bullish trade idea in PFE when the stock was $47:

Buy PFE ($47) May 47.50 call for $2.50

Now the stock is $53 and the call is worth a little more than $6, it makes sense to roll this bullish view up and out by selling the May 47.50 call at $6.15 and buying the June 55 – 60 call spread for ~$1.25