Yo Pit Crazies,
You don’t think Ford Motor Corp. (Ticker F) screwed us?
I think they did!
Their earnings report pushed a big warning on chip supply … and they can’t make cars without chips.
I don’t mean potato chips (a shortage there is my fault) … I mean semiconductor chips.
The Chips Fall
I think part of the market agita on Friday was the F report …
Semiconductors now have a trillion-plus in market cap and are a huge part of the global economy. I expect chip supply will increase in the future — since that’s the classic supply-and-demand cycle — but I think Invesco QQQ Trust Series 1 (Ticker: QQQ) caught a cold and it spooked the market. Remember the QQQ holds the largest Big Tech stocks like AAPL, GOOGL, AMZN, NVDA, INTC — and the concentration there in the top five is massive.
Now it will be harder to make money buying calls since the “chip dip” takes upside out. I like buying calls when the upside looks like a big ramp up. You need head room up top for stocks to rally. If there is little growth, and no revenue growth, in the short term the market is less likely to take off …
With a looming chip shortage, the feeling I get is a lot of sideways action.
Chart It Up
F 30-day candlestick chart. Yellow line 60-day implied volatility.
Note from the volatility chart above that F option prices did not drop a lot after the earnings report.
Before COVID, F volatility was in the mid-20% range. It is still in the mid-40% range, which makes selling options a decent alternative to buying them.
I even tried to sell the F May21 11 puts for .34 during an appearance on the The Options Insider podcast on Thursday — but I missed them. I then blamed host Mark Longo for distracting me. Umbrage!
F traded just over $13 in 2021, so it is well off those highs. The F Jun18 11 puts are .45. That is close to a 4% yield (sell the cash secured put/strike price = put yield) to June expiration and I don’t think we’ll see that kind of gain out of SPX to June.
Option Pit DC and Wall Street Insider Frank Gregory and I run the Power Income Portfolio and I can see F, with its green ambitions, finding a spot there one day.
The Lesson: Sometimes a selloff in a stock is a good time to sell puts and add the stock to a portfolio at lower prices. In the meantime, you get paid to own the stock.
Pro Trading Room:
This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session.
Here were some of the comments out of the Pro Room on Friday:
- “VXX hod (high of day) SPX not lod (low of day)”
- “SPX barely a move from the open”
- “Crazy bid for VIX futures into the weekend”
- “I say we need to absorb EOM (end of month) rebalance selloff in equity before another test of 4,200”
Translation: We have some sharp traders in there and the consensus was SPX was feeling a little toppy. I don’t know if that leads to a run to 4,000 in the S&P, but VIX futures were moving higher — way above the SPX dropping lower. That usually is a danger sign and signals a nervous market.
The Pro Room also produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies:
- Sell-to-open Newmont Corp (Ticker: NEM) 21May 60 puts for .60. NEM goes ex-div (0.55) on 2Jun (leaves one week to adjust)
- Buy-to-open Twitter (Ticker: TWTR) Jun 50/60 strangle for $3.20
Mark Sebastian runs our marquee long option strategy. SB specializes in low-implied volatility calls and puts and managing trade size for a risk-adjusted portfolio of options.
Mark bought British Petroleum (Ticker: BP) Jun18 25 calls on Tuesday. They are up a bit now, but he’s still looking for higher prices.
Mark uses the Robinhood Radar to find order flow in active names.
Going green with a call buy in Workhorse Group (Ticker: WKHS) May14 12.5 calls. The AAPL calls Robinhood Trader opened on Thursday were closed on Friday after the chip news.
The Power Income Portfolio:
Frank Gregory and I will run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my option expertise.
For now, I’m following our Power Income Portfolio trades here in the The Rundown each week as. So you have to tune in to keep up!
The trade I currently like from Frank’s list is Palantir Technologies (PLTR). This is a growth stock play on Big Data. I want to ride this trade to just before earnings on May 11 and close the calls for money.
- I own the PLTR May21 24 calls and 21.5 puts.
- I am looking at buying the PLTR May07 24/23 puts 1 x 2 for even money to bring in some cash. That way, if PLTR pins $23 next week, I can pick up $200 or so.
- This acts like a put credit spread but breaks even down to $22. Note again: I already own the 21.5 puts; I expect to add the 1 x 2 put spread Monday.
If you have any questions, I will chat on it in the OP Markets Show on Tuesday.
VIX closed in Zone 3 (18-23) for the first time in a week — and that puts a halt on the drop to 16. This is a big inflection point to see if the market really takes the F warnings and QQQ performance as a serious threat or just a ripple.
Vol Edge Trade No. 85 bought VXX May21 39/35 put spreads are just down now but there’s a long cycle left with time for it to make money..
In VTC Trade No. 244, I bought the VIX May19 19 puts for 1.20 two times and bought one VIX May19 22 call for 1.60 one time. The trade is down but now I am looking to close the May19 22 calls if we move up the zone anywhere near VIX of 23.
Remember, a lot of vol strategies I use are market neutral. That means if SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.
I added an S&P 500 stock ETF (Ticker: SPY) May21 385/400/415 put fly for 1.70 three times and one SPY May21 421/431 call spread one time. This gives me a cheap look at a short-term retracement.
This trade has a great chance of producing big dollars this week. Stay tuned!
Like what you’re seeing? Have more questions? Drop a comment below!
To Your Trading Success,