Happy MLK day. Welcome to the second newsletter of 2022. Last week turned out to be quite interesting based in part on everything that was emanating forth from the Fed, including of course the inflation numbers. Despite the unfolding sell off, I mentioned early last week that we remain very much in a “risk on” environment. I know my own personal trading certainly reflected that reality.
The Big Picture
While things still look uncertain, it is important to note that all leading indicators continue to signal risk on. Lumber to gold, XLU/SPY, and SSO/SPY are all confirming that there is not yet any need to panic. When all is said and done, it seems to me that the market is trying to price in the first rate hike. Despite all of this recent volatility though, VIX has only closed above 20 one time thus far this year.
Nevertheless, we are seeing massive inflow toward leveraged short ETFs such as SQQQ and TZA, and while some indicators are saying there is no need to panic, fear does seem to be building up in some segments of the market. I believe this is the week for reversals and finding bottoms on some specific names. The chart below demonstrates the deleveraging underway in the market and, at least among speculators, a lack of bullish expectations.
Option Trades for the Week
With this week being a short week, I do not have many positions open except my CRM, FB, and MSFT from last week, but I sense there are some intriguing plays that could work for next week.
TSLA: trading in a range now. A short strangle could be very profitable. Sell $960 puts, sell $1200 calls, expiry for next week.
TNA: $70 support continues to hold. Risk reversal could be very profitable here. Sell $70 puts, but $72 calls with target of $82 for this week.
DIS: 151/156 bullish spread for a gap fill trade.
TSM: not much gas after great earnings. Bearish call spread 145/147 to take advantage of heightened volatility and consolidation after earnings.
Tweet of the Week
My tweet of the week is from Bill Ackman, who believes the Fed should raise the rates by 50 bps in March in order to restore credibility. I am very curious to see how Ackman is hedging against this potential rate hike. His 13F filing will definitely be telling.
One Last Thing
A couple of weekends ago, I published an article on Medium explaining why it is not an ideal time to invest in airlines. I would appreciate it if you would check out my article here. I welcome any comments you might have.
To your success,