Fabulous Friday – Nasdaq’s Big 4 Come Through

ABX missed earnings but it was a one-time expense so we still like them.

Wow!

What a big day for tech as Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT) and Intel (INTC) all beat earnings estimates and all raised guidance – pretty much justifying the crazy Nasdaq run – 6,666 it is (see yesterday's Report)! I hate to say it but it's not a bubble when earnings are blasting higher and all 4 of the big tech names are benefitting from the explosive growth of Cloud Computing and the Internet of Things.

I will be on Benzinga's Pre-Market Prepthis morning – just in time to look over the GDP report and I'm sure we'll be discussing the Nasdaq and where we could go from here. Last time I was on the show was September 29th and we discussed our Limited Brands (LP) spread, which has already moved up from $1,600 to $4,200, so up $2,600 (162%) in short order but only "on track" for our 800% projected gain.

We also talked about using the Russell Ultra-Short ETF (TZA) as a hedge with 50 Nov $12 calls at $1.95 ($9,750), selling 50 $14 calls for 0.70 ($3,500) for a $1.25 ($6,250) net cost, which we offset by selling 5 Apple (AAPL) 2020 $130 puts for $11.20 ($5,600) to drop the net of the spread to $650. Despite the rally, TZA is at $13.45 so the spread is $1.45 ($7,250) while the AAPL puts have fallen to $10 ($5,000) so net $2,250 is up $1,600 (246%), despite not even needing our hedge during this rally.

Why does that work? Because we are Being the House – NOT the Gambler and selling premium when we establish our spreads. The only sure thing in the markets is that premiumd DOES expire – and that gives us an edge in every trade we make.

This morning we discussed a variation of yesterday's long trade idea on Celgene (CELG):

  • Sell 5 CELG 2020 $80 puts for $9 ($4,500)
  • Buy 10 CELG 2020 $80 calls for $30 ($30,000)
  • Sell 10 CELG 2020 $110 calls for $16 ($16,000)

That trade nets you in for $9,500 and returns up top $30,000 for a $20,500 profit (215%) if CELG can get back over $110, which we don't think is too much to ask. Worst-case is being assigned 500 shares at $80, which is 20% below the current price, which is already 30% below the summer price. That's the way to buy a stock on sale!

The next trade idea we discussed this morning was ABX, also from yesterday's Report. ABX missed earnings but it was a one-time expense so we still like them and now you can:

  • Sell 25 ABX 2020 $15 puts for $2.60 ($6,500)
  • Buy 40 ABX 2020 $13 calls for $3.60 ($14,400)
  • Sell 40 ABX 2020 $20 calls for $1.30 ($5,200)

That one nets you in for $2,700 on the $28,000 spread so the upside potential is a gain of $25,300 (937%) at $20 and, if we're still this low at Thanksgiving, that just beat out Limited Brands (LB) for our 2018 Trade of the Year! The race isn't over yet because JC Pennys (JCP) is tanking the entire Retail Sector with terrible earnings and a 25% drop pre-market but that made us look at Macy's (M) again, as they come back to test $20 and that makes them another contender for Trade of the Year with the following:

  • Sell 20 M 2020 $18 puts for $5 ($10,000)
  • Buy 50 M 2020 $18 calls for $4 ($20,000) '
  • Sell 50 M 2020 $25 calls for $2 ($10,000)

That one puts you in a no net cost, $35,000 where the upside is infiity percent if Macy's is back over $25 in 2 years. On the downside, you may have to own 2,000 shares of M at $18 ($36,000) so make sure you REALLY want to own them at that price. Just the bull call spread is good with no margin at all at net $2, since it pays $7 for a $5 (250%) gain if all goes well but we have enough confidence to eliminate our cash outlay in exchange for promising to buy the stock 10% lower than it is now (and 18% lower than yesterday's close).

As I pointed out on the radio show, just because JCP sucks, doesn't mean all of Retail sucks, just like the San Francisco 49ers sucking (0-7) doesn't mean you should bet on every football team to lose (unless they are the Giants, of course). Even with the evidence that both coasts suck, you can't extrapolate that the whole country sucks. Only 90 miles away from the Giants, the Philadelphia Eagles are 6-1 but the Raiders are 3-4 and the Chargers are 3-4 so we can, scientifically say that California does, indeed – suck… Oops, my bad, the Rams are back in LA and they are 5-2 – I guess we have to count that – even though they stole them from St Louis.

And just because some of the Big Tech names are going gangbusters doesn't mean all tech deserves sky-high valuations. That was the mistake people made in 1999 and ETFs and index funds contine to make that mistake every day. While it's nice that 4 of the greatest companies on the planet are doing well – it's not a true indicator of the World's economy as their performance is highly concentrated in an area of the economy that's a COST to most other companies (cloud storage, IOT devices).

It remains to be seen whether the other indexes follow suit or take advantage of the mindless ETF buying to stage a little sell-off. Gotta love those TZA hedges! We're also short the Dow Futures (/YM) at 23,400 and the Russell (/TF) below 1,500.

Have a great weekend,

  • Phil
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