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: Not all stock indexes are created equal, in fact by design they are not. Last week we took a look at the S&P 500, a market cap weighted index that has been on a run-away breakout for the last month, seemingly making new highs every day.

The top five holdings of the SPX (MSFT, AAPL, GOOGL, AMZN & FB) make up nearly 25% of the weight of the index… so their outperformance is dragging up the index.

But the RSP, the S&P EQUAL WEIGHT index, where all holdings are equal, has actually outperformed the SPX YTD (20% vs 16%) but has failed to make a new high in two months, suggesting poor breadth.


Trade Idea #1: Sell Banks, Q2 likely as good as it gets for 2021…

With most of the major banks reporting there was little to shake a stick at, but also little to be too optimistic about for the balance of the year given the uncertain rate environment, difficult comparisons, fiscal stimulus running off this month, and a volatile reopening that will face fits and starts with virus variants.

From May 26th: XLF $37.38 Buy July 37 – 33 put spread for 75 cents

Now with XLF ~$36.55 this spread is worth only 65 cents. I want to roll this down and out.

 

New Bearish Trade Idea: XLF ($36.50) Buy Sept 36 – 32 put spread for 80 cents

-Buy to open 1 Sept 36 put for $1

-Sell to open 1 Sept 32 put at 20 cents

Break-even on Sept expiration:

Profits of up to 3.20 between 35.20 and 32 with a max gain below 32

Losses of up to 80 cents between 35.20 and 36 with max loss above 36

Rationale: this trade idea risks 2% of the ETF price, has a break-even down ~3.5%, and a max gain of 9% if the ETF is down 12.5% in two months.

 


Trade Idea #2: Long TSM, the stock is breaking out of consolidation after a period of underperformance, bottlenecks in supply chains abating should help 2nd half guidance. I want to put this trade on in the coming days with a pullback/retest of the downtrend, possibly closer to $120…

 

Bullish Trade Idea: TSM ($124.80) Buy Aug 125 – 140 call spread for $3.50

-Buy to open 1 Aug 125 call for 4.25

-Sell to open 1 Aug 140 call at 75 cents

Break-even on Aug expiration:

Profits of up to 11.50 between 128.50 and 140 with a gain of 11.50 above 140

Losses of up to 3.50 between 125 and 128.50 with a max loss of 3.50 below 125

Rationale; this trade idea risks less than 3% of the stock price, has a break-even up 3.5%, and a max gain of 9% if the stock is up 12% in a little more than a month.


Lookback: from last week

Hedge Idea: SPCE ($44) vs 100 shares long Buy Aug 60 – 37 collar for even money

Now with SPCE at $37, the Aug 60 calls are offered at $1 and the Aug 37 puts are bid $6, so the collar is worth $5 that cost nothing. The stock is down $8, but you have mitigated $5 of losses of the long stock. Cover the short call and maybe spread the long put by selling a lower strike put in Aug expiration.