Risk Reversal - In The Money Podcast

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:


Here are my notes from today’s show:

Macro: Q1 earnings were better than expected, optimism about second-half growth is increasing yet two of the biggest market leaders (AAPL & AMZN), with two of the largest market caps in the world could NOT rally following BLOW-OUT results. The market could be in a holding pattern as things might be as good as it gets.

Trade Idea #1: Long Twitter (TWTR) – Shares of TWTR were hit hard last week following their disappointing Q1 results and Q2 guidance. Investors were particularly disappointed in their weak user growth and brand advertising results that lagged peers like SNAP Inc, Facebook, and Pinterest. Deplatforming the former President led to lower engagement in the platform in Q1 but the company did say they are starting to see a pickup just as live events are starting back up again just as new products like Revue (Substack competitor) and Spaces (Clubhouse competitor) are rolling out to broader audiences.

The stock has pulled back to the uptrend that has been in place from its 2020 lows which is just above its 200-day moving average which should serve as decent near-term support.


Bullish Trade Idea: TWTR ($54) Buy July 55 – 70 call spread for ~$3

-Buy to open 1 July 55 call for 3.60

-Sell to open 1 July 70 call at 60 cents

Break-even on July expiration:

Profits of up to 12 between 58 and 70 with a max gain of 12 at 70 or higher

Losses of up to 3 between 55 and 58 with max loss of 3 below 55

Rationale: This trade idea risks ~6% of the stock price, has a break-even up 8% and has a max potential gain of up to 21% if the stock is up 28% in a little more than two months.

Since the March 2020 lows, the stock has had two rallies of 80% and one of 45% when bouncing off of the uptrend.

Trade Idea #2: Bearish Wells Fargo (WFC) – The stock has had a heck of a run from its lows in October, up 120%, doubling the performance of the XLF during that time period. WFC has had its own unique challenges but has benefitted like its peers from optimism about the reopening of the economy, the booming housing market, and rising interest rates. We could see a cooling of this enthusiasm as investors start to price in decelerating growth in the back half of 2021 as valuations have become rich on a historical basis. While the stock trades cheaply to JPM & BAC on a price-to-book metric, it does trade expensive to Citi. The stock also is at a tricky technical resistance level, the long term breakdown level from Feb 2020 and the downtrend from its 2018 highs:


Bearish Trade Idea: WFC (~$46) Buy June 45 – 40 put spread for ~$1

-Buy to open 1 June 45 put for 1.40

-Sell to open 1 Jun 40 put at 40 cents

Break-even on June expiration:

Profits of up to 4 between 44 and 40 with a max gain of 4 at 40 or lower

Losses of up to 1 between 44 and 45 with a max loss of 1 above 45

Rationale: This trade idea risks 2% of the stock price, has a break-even down ~4%, and has a max gain of ~9% if the stock is down about 13% in about a month and a half.

Lookback: On March 31, I detailed a hedge for long holders of AAPL

vs 100 shares of AAPL at 123 buy May 115 – 140 collar for $1.25

Time to manage the hedge… keep a close eye on the short call, possibly close it and leave the long put