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Market Pulse: How Does Risk Off Really Look Like?

By Ardi Aaziznia  |  
Market Pulse  |  
Apr 26, 2022
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Hello Traders,

I hope you are well and enjoyed your weekend. We are heading into another choppy week in the market with all eyes on big tech earnings. Major heavy hitters in the market will be reporting, with Microsoft and Google reporting after hours tomorrow. The guidance these companies give will be a very important factor with regard to how the market is going to act. You’ll recall how Netflix’ guidance sparked fear of a slowdown and economic recession. One question of many this time around is whether the lockdown in China will impact Apple’s iPhone sales and production. With inflation at a current high of 8%, real earnings yields (after inflation) have gone negative for the first time since the early 2000s.

The Big Picture

Before getting into the sentiment and big picture, I want to spend a few sentences describing what a true risk off environment feels like. In a true risk off environment, you will see risk assets (such as stocks and bitcoin) sell, while safe haven investments (such as bonds and gold) hold or even rally. We have not seen this in the past several months. Despite equities selling off, bonds also sold off, making it a challenging environment for position traders. Part of the reason for bonds selling off was the Federal Reserve’s aggressive rate hike plan which led into a 10-year Treasury sell off. Nonetheless, I wrote last week about how we should be getting close to the bottom on $TLT. Since then, $TLT has held up quite nicely in comparison to risk assets and it seems like the inflows are coming back to risk off.

While the market could very well have a strong week and recover some of last week’s losses, the sentiment remains bearish. The put/call ratio (open put contracts divided by open call contracts) has reached some of its highest levels since March 2020. At the same time, SKEW has moved lower, showcasing the fact that more and more market participants are purchasing more and more downside protection.

Option Trades for the Week

I made an amazing trade today with a risk reversal on $TLT. I sold $118 puts and used the money to finance $121 calls. This was built upon my thesis of risk off assets finally behaving like risk off assets and yields topping in the short term. I am also going to set up options plays on the majority of the big tech names. My guess is that we will experience a reverse condor, with capped profits on the upside, but unlimited profits on any potential downside. For your reference, the payout will look something like what follows. In this market, the probability of a miss is much higher than it is for a beat.

Tweet of the Week

The news is out! Elon has bought $TWTR for a majestic $54.20 number! I must admit, I was in the camp of people who thought this offer was a joke, but Elon has secured the funding and now, Twitter, after Tesla, will be his biggest investment. The majority of the funding will be financed via debt, at SOFR + 4.50%. With the rate moving to 2.5% by year end, this puts the interest rate at 7% on the loan. That means $25.5 billion in debt and, at 6.5% to 7%, interest expenses on the debt will be $1.5 billion. Believe it or not, that is an astonishing 27% of next year’s sales! Although this deal is certainly head-scratching, I do have a theory as to why Elon Musk is doing it, and I will be discussing that in the chatroom. Stay tuned!

One Last Thing:

I am also now on twitter! Let’s connect there as well for more of a dialogue.

To your success,
Ardi

Peak Capital Trading

Peak Capital Trading was formed in 2020 as a proprietary trading firm based in Vancouver, British Columbia, Canada. Founded by veteran traders and Wall Street executives, our mission is to work with a diverse pool of Canadian and international traders in order to establish the leading firm for trading US stock market equities.

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