Posted March 30, 2014 20:16
Over the last few weeks, many of the high-flyers have fallen over 20%. All of these names are in the tech/biotech sector. More specifically, I am looking at buying some calls in IBB (the Biotech ETF) and NFLX.
First the Biotechs: right now the Biotech index has sold off more than 17% from the high. Almost all metrics show that IBB is extremely oversold and I think the bottom is near. The 200 DMA is at $216 and right now IBB is at $229. I think that if IBB were to get down to $220-$225, it would present a very good opportunity to buy some ATM calls expiring in June. Right now the ATM June calls cost around $13. I believe that IBB will regain at least half of its losses by June expiration. If that were to occur, then the option would be around a 100-150% gain. The reason that I think IBB gains back half its gains is because usually after a big correction there is a 50% retracement.
This chart shows the last big Biotech correction, and it came back to the 50% retracement:
I think that the market still has another leg higher before suffering a 10% correction. However, there are many cracks in the technicals of the market and I would only be looking to put on short to medium term trades. The only reason why I am buying June calls is because I want to give myself time for the Biotechs to bounce and I do not want time decay and IV decay to hurt me that badly. The IV is pretty high now on the Biotechs because of the recent volatility and, therefore, any bounce would cause nearer dated options to take a hit due to the IV decline.
Next is Netflix: for Netflix, I would only be looking at buying weekly calls because I think any Netflix bounce is going to be short-lived. It is quite possible you see a $20-$30 move higher on Netflix in a matter of days. The weekly $20 OTM calls on Monday should cost around $1.25-$1.50. Therefore, a $20-$30 move would yield gains upward of 500%.
April tends to be a pretty bullish month for stocks, and with the Nasdaq and the Russell each off around 5% from their highs, it may be smart to buy some May calls in these sectors. I do not think that the market will suffer many more moves to the downside because the VIX (volatility index/fear indicator) is still close to the lows. This tells me that the sell off in these sectors was due to a rotation out of the high flyers and traders do not fear the sell-off. The first quarter will basically end up flat. It is quite possible that the market consolidated during the 1st quarter and will make a sharp move higher over the 2nd quarter. If that is the case, then I think that April could make for an explosive move, and with options relatively cheap in the indexes, I think it is smart to be exposed to the long side for April.
Posted February 20, 2014 10:25
A seasonality chart is one of the best charts, especially when the first two months of the year match up almost perfectly with those seasonality trends. More specifically, I am looking at the mid-year presidential cycle seasonality chart. The chart tells us that there is going to be a rally in March and April. I am giving that prediction a lot of credence because this very same chart predicted a pullback in January, which is exactly what happened.
I want to play this rally in a very simple manner. I recently bought the May SPY 187 call for $3.25. Some of you may be asking why did you pay so much for a call? The reason is that I am going to put into play a call calendar strategy. This is when you sell shorter-term calls against your longer-term calls. I am hoping to collect around $0.10 to $0.20 per week for the next 10 weeks. This would, in turn, bring my cost down to $1.25-$2.25. Furthermore, if the S&P 500 index can hold 1850, I believe it will head to 1900 in short order.
The reasons are as follows:
- First, I think the Jobs Report will be a non-event, as the market brushes off any bad news;
- Second, 1850 is a significant level of resistance; if we can hold that level, I think the result would be short-covering;
- And lastly, I think that the next psychological level of resistance is 1900 and at that point I would expect the market to somewhat stall.
If the SPY were to hit 190 by March expiration, I would likely take off my May calls. If that were the case, I probably would not be able to sell that much premium (if the market rallied that quickly and seemed to have a lot of momentum, I would not want to cap my upside on my May calls).
In that case, I would expect a 100% gain. I was looking at a few individual names like Tesla, Amazon, and LinkedIn, but I was too slow to get in and, therefore, missed the opportunity in their gains. I think that the momentum names will continue to go higher, but I would only trade those names on a weekly basis instead of medium/long term basis.
Posted January 19, 2014 9:55
I am bearish on Gold for several fundamental reasons described below. Here is how I plan to play it.
The number one fundamental reason that I have for being bearish on Gold is that inflation is almost non-existent. Until I start to see inflation over 2%, I think that Gold prices will stay depressed. Why, you ask? For a couple of reasons:
First off, much of the market is driven by fear; until there are inflation fears, I do not see anyone rushing into Gold. This makes any rally in Gold “sellable”. I will concede that most people are bearish on Gold and that when people are overly bearish on a stock/index/commodity, many times the trend reverses.
Second, the gift that keeps on giving is the Fed. It seems that every month, when the FOMC gives their statement, Gold sees a nice 1-2% drop in the subsequent trading sessions. The reason is that if the Fed tapers, people start to fear deflation and that causes Gold to fall even further.
Third, when people fear deflation, they buy the U.S. Dollar and sell commodities, such as Gold. Moreover, whenever there is trouble in the world, people buy the U.S. Dollar now over Gold. Just a few years ago, Gold was considered the safe-haven of the world and now it is the U.S Dollar instead.
Lastly, with economic growth starting to pick up steam, investors may move more money into stocks, and in doing so sell Gold.
Just think about it, the technicals and fundamentals of the broader market seem positive. So, why would someone want to keep investing in an asset such as Gold that is now officially in a bear market? And even more importantly, the fundamental reason for buying Gold, i.e., inflation, is not even there.
How am I Going to Play Gold?
What I am looking at doing is shorting NUGT. This is the 3x-leveraged Bull ETF of the Gold Miners (GDX). Currently, Gold is rallying off of its lows it made in December. As a bear, I love this rally. It is much easier to make a bearish bet when the chart looks overbought than when it looks oversold.
I have illustrated a few charts to show why NUGT is the best way to short Gold. I put together several charts of NUGT and GDX to show you why shorting the 3x-leveraged ETF is smarter.
Posted December 31, 2013 17:37
What a year it has been, the S&P 500 has gained almost 30% and many stocks have been able to double in price. This year was the year for social media stocks and other high-beta names. But, what looks good for next year? Next year, I think it is important to buy fundamentally sound names and sectors. I still believe that the high flyers will do well, but they are going to be much more volatile and, therefore, more of a trade rather than an investment.
I am still bullish on the financials. I think that Bank of America along with Citi will have strong earnings growth and outperform the S&P 500. I am a fan of EBay and Apple. Both companies have solid earnings growth and are undervalued. EBay was in a trading range the whole year and I think it is due to have a phenomenal year next year. For Apple, I believe that the China mobile deal is a step in the right direction to achieving even better growth for the company and further strengthen their already strong balance sheet. I think that the stock is going to hit the coveted level of $700, the all-time-high.
Looking internationally, I think that Japan will have a very nice year, mainly due to the continued depreciation of the Yen. With the highly accommodative policy put forth by the Bank of Japan, I think that the Japanese market will continue to rise. There are two ways that I would play Japan: buy the DXJ stock and short the FXY. The DXJ is a Japanese equity ETF, and the FXY tracks the Yen/Dollar ratio. By shorting the FXY you are betting that the Yen weakens against the Dollar.
Now, for a trade into the New Year. I believe that Twitter is going to continue to do well. There is a lot of options activity that indicates to me that Twitter will rise. Everyone’s short argument is that valuation is insane. I’ll admit it, it is insane. There is no sound reason to buy Twitter at this level based on fundamentals. However, the way that the market is trading, you have to look at the chart and the options. Twitter may crash the same way Tesla may crash, but at what point? Twitter may crash from $100 per share or maybe $200 or maybe higher. Right now, I want to limit my risk via options and I think that buying January and March OTM calls is the right speculative trade. I could be wrong and Twitter could sell-off back to the mid 40s or even lower, but by buying the option and not the stock, I am able to control the amount of money that I am risking without fearing a disaster scenario where Twitter plummets and I am stuck holding shares for who knows how long.
Happy New Year to everyone! Good luck trading and I hope that for everyone it will be a happy and prosperous year!
Posted December 8, 2013 19:48
This past week was filled with turbulence; the market sold off on Taper fears, Monday through Thursday, but then bounced back on Friday on the heel of a stronger than expected Non-Farm Payrolls report.
This past week I posted on Twitter (@MaxGanik) certain options I got in and why. I bought January $180 SPY calls. Let me explain why I bought those calls. First, I believe that the broader market will have a year-end rally and now that the jobs report is behind us, I think that there will be a market melt-up. The reasons are as follows; first, many hedge funds desperately need to catch up with the market as they are underperforming and will do so by buying stocks. Secondly, December is typically one of the most bullish months and I believe that it will be no different this year. The reason I bought the January calls is because I also believe that the first week of the New Year is going to be bullish and I want to have exposure to that potential rally.
Now on to my second purchase, DXJ calls. I am a bull on Japan for the following reasons: the charts of the Nikkei and DXJ are bullish, the Yen is continuing to weaken, and there does not seem to be an end in sight to the highly accommodative policy. I do plan to buy Leaps (January 2015) calls on DXJ, but I suspect that there will be a small pullback sometime during the first quarter of next year and that will be the time to buy Leaps.
Another way to play a rally in stocks is through the XLF, the financial sector ETF. I am long the January 21 and 22 calls. Over the last few days, there has been a lot of bullish action in the XLF; this is an indication to me that institutions are betting on a year-end rally.
I do not see any correction from now until the end of the year, unless the Fed Tapers at its December meeting. I highly doubt that will happen, but if it does, I would expect a quick 3-5% sell-off in the final couple of weeks of the month. I will most likely take off some of my positions in the SPY, XLF, and DXJ right before the meeting as a precaution. The jobs report was strong this past Friday, but I do not think that the Fed would want to insert any negativity in the market right at the end of the year.