PhilStockWorld 2023 Trade of the Year

We are generally bearish and expecting a sell-off in the next 90 days – keep that in mind.

That doesn’t mean we can’t buy things – it just means we need to keep our portions manageable and our hedges should be strong.  In our case, we have $5M worth of hedges and we cashed out the majority of our positions – so we’ll make a lot more money if the market goes down than up – but we still hope it goes up.

What makes a good hedge?  How about a free hedge?  Here’s one we discussed yesterday at the TD Wealth Conference in Toronto:

• Buy 50 SQQQ 2025 $40 calls for $23 ($115,000)
• Sell 40 SQQQ 2025 $70 calls for $19 ($76,000)
• Sell 10 SQQQ March $60 calls for $6 ($6,000)

That’s net $33,000 on the $140,000 spread so we have $107,000 of downside protection to start.  SQQQ is at $47.92 this morning and it’s a 3x inverse ETF to the Nasdaq (QQQ), so, to get to $70, it would have to gain $12, which is 25% of $48, which means the Nasdaq would have to fall 1/3 that much or about 8%. 

But it’s not free – yet.  The spread is $40,000 in the money to start and we can’t be hurt by the short March calls, we still get paid $20 over $60 but the trick is we collected $6,000 for the quarter and we have 7 more quarters to sell – that is how we’ll get our $33,000 back.  Even better, if we feel more bearish – we sell less short-term calls and, if we feel more bullish – we sell more short-term calls.  Very easy to adjust….

And, of course, any move up in the Nasdaq should make us money on our long positions.  The Money Talk Portfolio, which we reviewed yesterday, will be on track to make $192,296 in a bullish market – far offsetting our maximum $33,000 loss on the hedge – which uses no margin.  

As I said, our Short-Term Portfolio (STP), using hedges like these, has $5M worth of protection in it at the moment and we’re about 3x over-covered on our positions so, ideally, we get a nice sell-off, cash out our hedges and go on a buying spree – that’s our plan for the Winter.  

Meanwhile, there’s no harm in going shopping so let’s take a last look at our runners-up for Trade of the Year and see if we can find some fits for our portfolios:

• • AAPL – AAPL is a 4-time Trade of the Year winner and almost always a runner-up.  Yesterday’s drop back to $141 coupled with a higher VIX makes it exciting for a new entry, especially when we can sell the 2025 $130 puts for $15.75.  Let’s sell 10 of those for $15,750 in the LTP, as we would be happy to have 1,000 shares for net $114.25 if assigned. 

AAPL also acts as a nice offset to our SQQQ hedges as they are very unlikely to be down if the Nasdaq is up so these puts cover half the cost of the hedges we discussed above and, if the Nasdaq and AAPL fall – then the money we collect on the hedges more than covers our AAPL position!

CMCSA – Like AAPL, we don’t think they’ll be immune from being dragged down with the indexes in a broad-market sell-off so, timing-wise, we’re too nervous to make them our TotY but, as a long-term investment – I love them.  5G and a cost advantage in activating new customers is why we like them into 2023 and they are trading below 10x at $35.50, so let’s add the following to our LTP:

• • Sell 10 CMCSA 2025 $40 puts at $8.70 ($8,700)
  • Buy 25 CMCSA 2025 $30 calls at $9.85 ($24,625)
  • Sell 20 CMCSA 2025 $40 calls at $5.10 ($20,200)
  • Sell 10 CMCSA April $37.50 calls for $2 ($2,000)

That’s a net $6,075 credit so our upside potential is $31,075 (511%) and we’re obligated to buy 1,000 shares at $40, less the $6,075 credit would be net $33,925 – a bit less than it’s currently trading for.  Of course we’ll be able to collect $2,000 a few more times (like our SQQQ play) and lower that basis even further and it’s not very likely the extra 5 short calls will burn us – so worth that risk.  

GOOGL:  So close to being our TotY.  The problem with GOOGL is that it’s over-indexed and would be dragged down with the broad market.   We are going to add the following spread to our LTP, however:

• • • Sell 10 GOOGL 2025 $90 puts for $12 ($12,000)
    • Buy 20 GOOGL 2025 $100 calls for $22 ($44,000)
    • Sell 20 GOOGL 2025 $120 calls for $14 ($28,000)

That’s net $4,000 on the $40,000 spread and our downside would be owning 1,000 shares of GOOGL at net $94 (the current price) as a worst case.  

• • JXN – We set up  new trade for them in the LTP yesterday, taking advantage of the high options premiums.  

• • SPG is our runner-up for Trade of the Year and a better trade for bigger players.  In the Money Talk Portfolio, we’re going to sell 5 2025 $100 puts for $15 ($7,500) to have a net $85 entry (27% below the current price). 

In our Long-Term Portfolio, we already have 15 2025 $80/115 bull call spreads and 5 short $100 puts from Oct 12th – so let’s be happy with the MTP play at the moment.   I noted a good new entry in yesterday’s Morning Report.   

And that means our Trade of the Year for 2023 is – TaDa! – YETI!  YETI beat out the competition BECAUSE it’s not very indexed and because they are growing so fast and selling to such a high-end crowd that the recession should not bother them too much. 

Currently valued at $3.6Bn at $42, YETI expects $200M in sales for an 18x valuation but growth is a solid 20% and there’s no debt impacting it at the moment.  YETI manufactures in the US, China and Phillippines but it’s not like they are competing with dozens of others for thermos parts or raw materials so supply chain shortages are having little effect on them.  

“For the third quarter, the cooler manufacturer notched a beat on top and bottom lines, driven by a 19.6% increase in revenue from the prior year. Gross profit increased 7% to $222.4M despite a 580 basis point decrease in gross margin due to higher freight, product costs, and the unfavorable impact of foreign currency exchange rates.”

The real topper for YETI, however, is the excellent options trade we are able to set up.  We already have a very large bet on YETI in our LTP but, for the Money Talk Portfolio, let’s add:

• • Sell 10 YETI 2025 $35 puts for $8 ($8,000)
  • Buy 15 YETI 2025 $35 calls for $16.50 ($24,750)
  • Sell 15 YETI 2025 $50 calls for $11 ($16,500)

That is a net $250 credit on the $22,500 spread so the upside potential is $22,750 (9,100%) and the goal of our Trade of the Year is to find the one trade we believe is most likely to return at least 300% on cash by the end of 2023 and I will be shocked if we can’t pull $1,000 out of this spread with ease.  

Our worst case here would be owning 1,000 shares of YETI for net $35 (less the $250 credit) and that’s 18% below the current price so, please, feel free to assign us!  

We have 3 Fed speakers today and we’ll see what Powell says at 1:30, ahead of the next Fed Meeting on Dec 14th.  Clearly we’re not expecting much help from the Chairman – hopefully we’ll have an easy time getting our fills on these trades..