KONSTANTIN VRANDOPULO:
Welcome back to another episode
of In the Money. I'm Konstantin Vrandopulo with
Fidelity's Trading Strategy Desk. And with me, as always,
Tony Zhang, chief strategist at OptionsPlay. Tony, another week has gone by. Happy to see you. How are you doing? TONY ZHANG: I'm doing well. Thank you so much for
having me back, KV. KONSTANTIN VRANDOPULO:
Tony, we've observed some emotional
and fast trading conditions over the past week. Last week, we were on at
the same time together, last Thursday. The S&P 500 was
trading around 5,500. And you've laid out your
case for the potential of some additional
downside, targeting potentially prior August
lows as a possibility. The S&P 500, of course, the
following day on Friday traded down to 5,400 or thereabouts. That was a 1.7% drawdown
in a single day, effectively closed on
Friday on day lows. Came back this week, beginning
of the week, strong out of the gate. Very volatile conditions
throughout the week, a lot of back and forth. However, the market
is resolving higher. I mean, here we are sitting
at around 5,600 now. So a trough-to-peak reversal
of about 3.5% of the upside. So the sellers, I think,
especially yesterday in the early morning--the late
sellers yesterday were caught offsides for sure. That's how it felt. Here we are
sitting at the highs of the day. Tony, the reason why I'm going
through this strategically like this is because
you and I are not going to be here for
the next three weeks. And what I wanted
to do is make sure that our clients
have some short- to intermediate-term targets,
some levels to be on the lookout for. I mean, you've discussed last
week very vividly that you would be looking at 5,650,
the prior swing high, and maybe even above 5,670 or
so, the prior all-time high in the S&P 500 as your
overarching resistance zone that the market would have to take
out to the upside to switch that bearish-to-neutral
bias short term. I'm wondering if you're
thinking about it differently, if you are spotting or eyeing
different levels of resistance relative to where we
sit right now at 5,600. And more importantly, what are
you watching going forward? I know the market is
repricing every single data point that is coming out. The market is very data
dependent--pun intended there--just like the Fed told
us that they're going to be data dependent. I'm wondering what
specifically are going to be the
key drivers for you and where the market is going
in the next couple of weeks, let's call it. TONY ZHANG: Yeah. Thank you so much, KV. First of all, I think it's
great that you laid it out so strategically. I think it's really important
for a lot of investors right now that are trying to do
that calculus of figuring out what is driving markets to
lay it out strategically, to get a sense for
a directional view. So as you said, we are
trading higher than where we were last week. But when we look at kind of
the macro picture and you look at the
economic picture here, it actually continues to soften. And the data that came out
over the past week or so has not been particularly
good for equities. We start off with another
payrolls disappointment on Friday. That was part of why I took a bearish tone going
into last week's payrolls number was because I was expecting the
labor market to come in softer. We saw the S&P react, as you
said, down 1.7% on Friday on that jobs number. And then this week,
we had CPI come in a little higher
than expected, specifically that
shelter component of it, which cemented the fact
that we were likely only going to see a 25 basis point
cut here for September. Now, that does,
for some investors, create the view that right now
the economy is fairly strong and that it can support
only a 25 basis point cut, lending ourselves to
kind of the soft landing view of the markets,
which is part of why I think we saw that
huge reversal yesterday on the back of
what was initially all 11 sectors in the red. When we're looking at
the markets right now, all 11 sectors in the green
within just one trading session. But I think we also have to pay
attention to some of the things that some of the companies
have been talking about. JPMorgan and Ally over
the last week or so have really started to
report rising delinquencies amongst their
consumers and starting to dim their outlook
for 2024 and 2025. And I think that we
should be paying attention to that from an
economic perspective to see kind of the shift in
the economy starting to soften, starting to cool
across the board. Now, tech has been the
leader of this market over the past few
years, certainly over the past couple of years
with regards to the AI theme. And that really kind of came
roaring back here yesterday afternoon and continuing
to push markets higher here today as semiconductors
have led this market higher. So I do think it's
important for us to be aware of the macro
picture, which clearly is starting to
cool a little bit, but we still have to
pay attention to what's driving the markets right now. And the productivity
gains potentially from AI, the continued huge
capital expenditure that these tech companies
continue to spend on AI to try to gain dominance in
this particular space is likely going to
continue to drive sentiment over the near future. So when we talk about levels
here on the S&P 500, 5,650, 5,670 is still the level that
I'm looking at to the upside. If that gets taken
out to the upside, we can't help but continue
to take a bullish stance here in the overall markets. But as things soften and we
continue to see economic numbers come in lower than expected, the
risk to the downside is still that 5,100 level that I'm
paying attention to on the S&P. KONSTANTIN VRANDOPULO:
Yeah, Tony, thank you so much for that. I appreciate it. I mean, there are
so many variables to be taken into consideration. I think our audience certainly
appreciate your views, especially given
the fact that we'll be away for a couple of weeks. So given that complex
backdrop, Tony, what is your first
trade idea of the week? TONY ZHANG: Yeah, the first
one I want to take a look at is more defensive in nature given the sort
of volatility that I do expect from markets not
only in the next few weeks but potentially next few
months as we kind of navigate how the Fed is going to
cut rates between now and the end of the year. We also have an
election coming up. So the trade that I
want to take a look at is GSK, which is formerly
known as GlaxoSmithKline, the biotech company,
because we've seen some strong relative
performance from this stock over the past couple of months. And in the health care space, we
continue to see that sector play defense. And I think given the current
volatile environment, it's time to take a look at some of
these types of stocks for your portfolio. If we take a look at
a chart here of GSK, it's been trading in a
range between $37 and $45 over the past year
or so, but it's starting to outperform the S&P
over the past couple of months within that trading
range and starting to target the upside of that range around $45.50. And that's really
my upside target. And what we see is a
potential breakout above that and continue higher above
that for long-term investors. And more importantly, if you
look at the fundamentals here, that's really what I
think is attractive for GSK going into these
types of more volatile times is the fact that it
only trades at about 9.5 times forward earnings, which
is a pretty substantial discount to the industry average,
which is around 17.5 times forward earnings,
especially if you consider the fact that the expected
growth rates for GSK is actually higher
than the industry. EPS expectations are about
14% year-over-year growth versus only about
8% for the industry. And their net margins are
higher than the average for the industry. So they are more profitable. And the fact that you
add another 3.5% dividend yield on top of that makes
this look fairly attractive as a long-term investment. So the trade structure
that I want to use for this is to actually utilize
options to take advantage of the current
volatility and try to collect some income
to potentially own this stock for the long run. So I'm going to sell a
cash-secured put going out to the October expiration,
selling the $43 put. That's effectively
at-the-money put. Earlier today, you can
collect about $0.95 for that cash-secured put. Now, when you sell
a put like this, you have the obligation
to buy 100 shares of that stock for every contract
you sell if the stock is below the strike price,
the $43 strike price, on October expiration. You're collecting $0.95 per
share on this particular stock. So that means if the
stock gets put to you, you will effectively own
the stock at about $42.05. Now, just to put
into context, $0.95 worth of income for a $43 stock
equates to a little over 2% that you're going to
earn in about the 30 days between now and expiration,
a little over 30 days. Now, keep in mind,
this stock earns about a 3.5% dividend yield,
which is quite attractive. But here you're earning
about 2% in just 30 days versus 3.5% over one year. That's a type of
yield that I'm looking for in this type of environment
to sell a cash-secured put. And the overall risk that I'm
taking here is similar to owning the stock for every 100 shares
or every put contract that I sell, I'm taking on about
$4,200 worth of risk. But keep in mind that that
risk is if the stock declines to zero, which in this
particular case I think is fairly unlikely. So collecting $0.95 worth
of income here, I think, is a good way to take advantage
of some of the volatility that we see here in
the markets and play a more defensive play in this
type of market environment. KONSTANTIN VRANDOPULO:
Very interesting. Straightforward trade structure
there, neutral, bullish, premium selling type of an idea. Tony, what I do
want to point out for our audience
members is that GSK, as the stock over the
past 90 trading sessions, has traded on average
3.6 million shares a day. The options market, the options
trading equivalent, of course, is not as deep in
terms of liquidity. So less than 3,000 contracts
per day over the past 90 trading sessions have traded on average. So wider bid-offer spreads
in this particular name doesn't mean that
it's not tradable. What it does mean,
however, is that if you are deciding to
take this trade, it would make sense to be prudent,
utilize a limit order when executing it for a
credit, especially if you're going to decide to
do this particular strategy in size. Time to take a look at
the second trade idea. Tony, what do you got? TONY ZHANG: Yeah,
the second trade idea I want to take a look
at reflects the cooling economic picture that
we continue to see and what we're hearing from
CEOs such as Jamie Dimon talking about their expectations
going into the second half of this year and into
next year with regards to consumer spending and
consumer-spending habits starting to show
some delinquencies. So the trade that I want
to take a look at here is Amazon, because we actually
took a bearish trade here in Amazon back in July. And we're back at a level
similar to when we took that trade that I think is worth
paying attention to here again because the challenges that
consumer--as consumers become more selective in their
spending and a labor market that's starting to slow, those
are the types of conditions that will likely weigh on sort
of e-commerce type stocks. And Amazon generates
65% of their revenue from their e-commerce business. Their AWS business
is incredibly strong and I think will continue
to perform quite well. But when you have the two-thirds
of your revenue generated from e-commerce,
that's really where I see some risks here to
Amazon, especially when we look at the valuations. Now, if we first look at
a chart here for Amazon, we brought this
trade back in July when it was trading just
around that 180 level prior to that
earnings announcement. And the stock broke
below that support level on that earnings announcement. And we just managed to trade
back up to that 180 level, and actually just based on
yesterday's price action. And today, we broke
back above 180. However, I do think that
that 180, 185 support level is now going to likely
act as resistance and potentially provide
a bit of a short-term cap as far as how much higher
the stock can go from here. So if you look at the fact that
momentum right now is still fairly negative here on Amazon,
I think that the 180, 185 level is likely potentially a level
where we could potentially reverse lower. And the risk/reward
actually favors adding some bearish exposure
at these particular levels. And more importantly,
I think it's really the fundamental picture
that drives my thesis on this particular trade. Amazon trades at 31
times forward earnings, which is nearly 50% higher
than the average S&P 500 stock from a valuation perspective. And then you look at the fact
that Amazon's net margins are only about 7%, meaning
Amazon actually doesn't generate a lot of profits. And a lot of that comes down
to the e-commerce business operates on extremely
thin margins. And that's really some
of the downside risks that I see here with
this particular stock. Now, Amazon is
expected to grow EPS by a pretty hefty margin
relative to the S&P 500. But I think that if you
look at the macro headwinds that we're starting to face
with the cooling markets and consumers becoming a lot
more selective and potentially credit card delinquencies
continuing to rise, I think that valuations here are
a little bit harder to justify in this type of
market environment. So the trade structure
that I want to use here is to sell some premium here. I'm going out to the October
25 weekly expiration. And I'm selling the
185/200 call vertical. What I'm doing here is
I'm selling the 185 calls. But if I were to just
sell the 185 calls naked, I'm taking on unlimited risk. And it would require
a lot of margin to sell that 185 call to take
a neutral-to-bearish view here on Amazon. So instead, what I'm going to do
is I'm also going to buy a $200 call against it. And what that does
is it certainly reduces the amount of net credit
that I receive on this trade. But what it does
is substantially reduces the amount of
risk that I'm taking. It limits the amount of risk
that I'm taking and reduces the amount of margin that's
required to get into this trade. So earlier today, you can
collect about $5.70 for this $15-wide credit spread. And this is a trade that's
going to offer about $570 of potential premium or
potential reward per contract if Amazon stays below $185
between now and that October 25 expiration and risking
about $930 per contract if Amazon is above
$200 at expiration. If it's above $200, I would say
my overall bearish thesis here is incorrect. And I would likely get
out prior to hitting $200. But those are some of the
levels that I'm paying attention to here right now. And by entering right around
that resistance level, my risk/reward is going to
be quite favorable here. KONSTANTIN VRANDOPULO:
Yeah, Tony, just a little better than 2-to-1
risk/reward on this trade. Amazon as a stock and
the options market in Amazon in terms of liquidity
are about as good as it gets. So nothing to worry about there. I mean, still makes
sense and is always prudent to utilize limit orders. But the bid-offer spreads
are much tighter in Amazon than it is in GSK. However, one of
the things, Tony, I wanted to ask you--maybe
you could elaborate on this particular point for our
clients in the audience. How does one gauge
the probability of not just being in
or out of the money, but the probability
of a trading strategy potentially being profitable? Do you have a go-to shortcut,
rough math sort of thing that you normally utilize
to figure that out? TONY ZHANG: Yeah, absolutely. Now, there are obviously--most
platforms will be able to calculate for you exactly
based on implied volatilities roughly what the probability of
profit based on history would look like down to the
exact decimal point. But for a lot of traders
who are looking for some of the
back-of-the-envelope math, one of the best ways to do that
is to use delta of the strike prices to gauge the probability
of the stock being above or below that strike
price at expiration. So when you're collecting about
a little over $5 here on this 185/200 call spread, that gives
you a break-even price just around $190. So what you can
do is you can take a look at the 190 strike
expiring on October 25 and look at what the
delta of that option is. So if you're looking at
the delta earlier today, it was probably
around 43, 44 or so. And what that equates
to is about a 56% chance that the stock will be below
$190 at expiration or 44% chance that the stock will be
above $190 at expiration. So you can use that as a quick
and dirty back-of-the-envelope way to gauge roughly what the
probability of profit on a trade like this, which in
this particular case, it's a little higher than 56%
because the break-even price is actually a little
higher than $190. It's around $190.70, but
that's close enough, I think, for a lot of traders
who are looking for some back-of-the-envelope math. KONSTANTIN VRANDOPULO:
Love it, Tony. Thank you. That's a great tip to keep in
your pocket if you're a trader. Lastly, we have
a lookback that I think requires some management. It's a trade that went in
our favor and then reversed. So let's talk about
that one, Tony. TONY ZHANG: Yeah, so a few weeks
ago I laid out a bullish thesis here for Autodesk. We bought the September
257.5/275 call vertical. This was an earnings play. And on earnings,
the stock actually reached that upper strike
price around $275 the day after earnings. Now, for some of you,
maybe you took profits on that particular trade. And if you did, good, great. That was an awesome trade. We bought this for about $7. But the stock, as you said, has
collapsed since that earnings announcement. It's trading back up to
around that 260 level here right now, a little bit
below the break-even price. And we are approaching
expiration. We're about less than two
weeks away from expiration. So I do think that if you
missed out on an opportunity to take profits on
this particular trade, I do think it's time to manage
this trade at this point. We bought this for around $7. Right now, it's
trading about $4.65, which represents about a 33%
loss on this debit spread. And I think, again, if
you have not taken profits on this particular trade or
cut losses on this trade yet, this is a good time
to actually do that. You're not losing a lot on
this particular trade, only 33% of the premium that you pay. So we haven't even
reached a stop-loss level. But I do think
that at this point, the probability of the stock
reaching back up to $275 by next Friday is
somewhat unlikely. And it's better off to save the
other two-thirds of the premium that you paid on this particular
trade for your next trade rather than hold
on to it and hope that this trade will turn
out to be a profitable trade at expiration. KONSTANTIN VRANDOPULO:
Yeah, Tony, as we like to say on the
Trading Strategy Desk, hope is not a strategy. Very important to
remember that, folks. This brings us to a close. I want to thank all of our
viewers for tuning in today. Again, quick reminder, Tony and
I or any other Fidelity hosts are not going to be
back for three weeks. The next show that you should be
tuning in to and looking forward to is going to
air on October 10. Don't forget, of course,
the Trading Strategy Desk does do a follow-up session to this particular show. It happens every Friday at
1:30 Eastern Standard Time. You can sign up for
that class by going to
Fidelity.com/InTheMoneyFollowUp. We also offer a Fidelity
Active Investor newsletter. You can find that by
going to Fidelity.com/Act iveInvestorWeekly. We will see you back
in about three weeks. Tony, it's been an
absolute pleasure. Thank you so much
for bringing us new, and fresh, and
interesting ideas as always. TONY ZHANG: Thank you, KV. It's a pleasure to be here.