An e-zine that keeps you informed on the hottest trends on Wall Street, provides you with the key information to make you filthy rich (*your results may vary)
by Joseph Hargett | October 21, 2022
Great Ones, you’re getting a two-for today! It’s Friday Four Play and Reader Feedback … two great tastes that I hope taste great together.
Dude, this is finance … not Reese’s.
Why not both? Come on, you know that’s what you love about Great Stuff. We all know it’s not my clean, close shave.
Thanks, Anthony Michael Hall.
Today, we’re talking about the Federal Reserve’s interest rate hike crusade and … put selling.
So let’s get right to it:
Any thoughts on put selling … choosing a strike price at least 20% below the current stock price … looks like a reasonable way to create an income stream, weekly or monthly.
Any thoughts are always appreciated.
— Alan H.
Thanks for writing in and being a Great One!
So, put selling, huh?
In this market? It’d take a miracle.
For all y’all who don’t know what put selling — or put writing (they’re the same thing) — is, please click here for more information.
There’s way too much information for me to explain today, and I really need to answer Alan’s question. And because this probably has to be said: If you don’t know what put selling is, don’t sell puts … or any options, for that matter. Educate yourself and get help first. Please.
So, Alan … you really wanna sell puts in this market. I can’t say I blame you. Option premiums are really high right now due to soaring volatility … and they look oh so tempting!
The problem with selling puts is that you really want these high option premiums, but, remember, premiums are high for a reason — i.e., volatility!
We have stocks jumping 20% to 30% every day. The major market indexes are also bopping around like a pinball, rising 3% one day … plunging 3% the next.
Still, that option premium looks really tempting … even at 20% to 30% out of the money. And you’re probably thinking you can take advantage of this volatility by picking a safe, relatively non-volatile stock and selling deep out-of-the-money puts on it.
Honestly, Alan, you can make money selling deep out-of-the-money puts … but it’s really risky right now. You have to watch your option selection, your market timing and the option itself to make sure you don’t get completely hosed and lose all your money.
Remember: When buying options, your risk is limited to what you paid for the option. When selling options, your risk is essentially unlimited.
In other words, Alan, you’d need a bottle of Pepto on your bedside table all the time.
Furthermore, let me give you two reasons why selling puts right now — even seemingly safe puts — could be a very painful ordeal.
First, Wall Street’s narrative that interest rate hikes are going to die down soon is false. There will be more rate hikes … and likely some rather aggressive ones. Philadelphia Federal Reserve President Patrick Harker said so himself yesterday:
If you’ve paid attention this year, you know that when the Fed raises interest rates, the market goes down.
If the Fed lifts rates more aggressively than Wall Street is expecting, those sell-offs are going to be sharp and could blow up your sold put option in a hurry … sometimes even before the market opens for trading, thus denying you a chance to exit the trade early and locking you into heavy losses.
Second, investor sentiment is still far too optimistic.
Wall Street and the financial media are partially to blame for this, as both have been selling the narrative that the economy is struggling, but otherwise is just fine. They’re actively denying that the U.S. in is a recession and claiming that the Fed will back off soon with tightening monetary policy.
This sizeable portion of lingering bullish hope will eventually evaporate. It’s how sentiment works … especially in market bubbles. Just take a look at this market bubble sentiment chart:
I’ve been looking at this chart for a while now, trying to figure out where we are in the process. After the recent market rallies, I believe we are now in the “Return to ‘normal’” phase — right on the precipice of all-out “fear” and “capitulation.”
While we have seen our fair share of “The World Is Ending!” headlines in the financial media, we haven’t seen enough to indicate that we’re at the point of peak pessimism or negativity. We need that peak, that complete and total admission that things aren’t alright at all in order to move past this market turmoil.
After all, you can’t truly address a problem until you acknowledge that you have one in the first place.
And while some investors and Wall Street talking heads have acknowledged the situation, far too many still have not.
But when they finally do … oh boy. The resulting market decline will decimate any investor who’s not thoroughly prepared.
Alan, I hope both those points tell you why selling put options right now is a very risky endeavor. It can be done … but y’all gonna need some whiskey and rye … and a hefty bottle of Mylanta.
In fact, you’d probably do better buying puts several months out right now — especially on the S&P 500 Index or the Nasdaq. But given how volatile things are, even that strategy can backfire.
What I recommend is taking advice from someone who’s actually been through this kinda insane bear market before. Someone like my good friend Ian King.
During the worst 19-month stretch of the 2008 financial crisis, Ian King turned $350,000 into over $6 million!
In his new special event, “Bear Market Fortunes,” you’ll discover Ian King’s very best strategy for making fortunes in tough times.
So start taking this bear market seriously. Get prepared now: Click here to find out how!
And without further ado, here’s your Friday Four Play:
One of these days, Great Ones, we’re going to gather around the earnings confessional and congratulate Snap (NYSE: SNAP) on a quarter well done. One of these days … SNAP stock is going to take its broken wings and learn to fly again…
Let me guess: It’s not today?
Nope. Not one bit. The Snapchat parent dropped an absolute dud of a report that was pretty predictable for anyone who’s tuned in for literally any Snapchat report before.
Revenue growth slowed during the quarter, reaching $1.13 billion and narrowly missing the target of $1.14 billion in revenue.
Earnings actually came in at a surprise (adjusted) profit of $0.08, topping estimates for a breakeven quarter. Though when you account for, you know, reality … Snap’s net losses actually grew 400% to $360 million, thanks to a whole lotta “restructuring” during the quarter.
Firing. That’s what that equates to. Snap had to shell out millions in severance pay and related costs, but hey, now the company’s all restructured and ready to take on the world, right?
Wrong. The single bright spot in Snap’s report — there was a bright side?! — concerns daily active users, or DAUs. Worldwide, Snap saw 19% more users year over year. But what good are those extra users going to do when you can’t monetize the users you already have?
Wall Street saw all this as more of the same from Snapchat, and its appetite for more Snapchat shenanigans wanes by the day. SNAP shares fell 30% on the report.
I’m a frayed knot.
One more time?
Rail stocks are not priced for a “freight recession.” You hear me now? What is this, a Verizon commercial?
Train-spotting analysts recently went on record to say, well, pretty much what I just said. Wall Street is fretting over rail stocks, such as CSX (Nasdaq: CSX) and Union Pacific (NYSE: UNP), due to a combination of higher wages, concessions from new labor contracts and waning freight demand.
Hence … “freight recession.” It’s kinda in the name.
But for as much as Wall Street’s worrywarts are worrying, that can’t stop CSX’s earnings hype train from rolling. The company posted a glowing report yesterday that reiterated its positive sales outlook for double-digit growth, sending CSX stock up nearly 5% in early trading.
Union Pacific, on the other hand, played right into investors’ fears, cutting its carload estimates because “markets are softening a bit.” Enough said.
UNP stock fell 7% yesterday, before rebounding about 2% on CXS’s good news. Wonder if those analysts think it’s priced for a freight recession now…
Just like that frozen pizza you popped in the oven and forgot about a half-hour ago, it’s been a hot, hot minute since we’ve checked in on consumer confidence. (Do you smell burning? I smell burning.)
So how is the average American consumer these days?
Alright then. According to American Express’ (NYSE: AXP) earnings, at least, all y’all consumers are just fine and dandy out there. Well … anyone who can get an American Express card, that is.
Revenue is up 24% from a year ago, setting a record high of $13.6 billion. Earnings also rose during the quarter, and both figures beat analysts’ expectations with room to spare.
And what would that pivot look like, I should ask?
Probably a whole lot like this: A year ago, American Express released $393 million from its cash reserves, you know, the cookie jar that you only break in case of defaults and credit blowouts and whatnot.
Last quarter, however, American Express added $387 million back in to the reserves, bringing its provisions up to $778 million.
You say you’re ready to pivot, American Express … but it looks like the pivot has already begun. Now what does that say about lil’ ol’ me, the consumer?
Would a week in Great Stuff be complete without a lil’ field trip to the rumor mill?
This has something to do with Elon Musk, I guarantee it.
Oh, indeed: The Musk Man cometh. I mean, he’s basically a full-time resident at the rumor mill. Today, however, we’re eavesdropping on those infamous “anonymous sources familiar with the matter” that y’all love to hear from.
Allegedly, Biden administration officials plan to review Elon Musk’s various ventures in the interest of national security.
Combine Elon’s “Russia-friendly tweets and his threat to cut off Starlink satellite internet service to Ukraine” with certain foreign investors involved with the Twitter deal — namely a Saudi prince, China’s Binance and Qatar’s sovereign wealth fund — and you get a whiff of what these nameless officials are after.
You’re not going to get any more info out of the White House though: National Safety Council Spokesperson Adrienne Watson told Bloomberg: “We do not know of any such discussions.”
Make of that what you will.
Elsewhere ‘round Musk’s menagerie of mischief, it appears that the people most dreading the Twitter takeover … are Twitter employees themselves.
The dude hasn’t even bought Twitter yet and is already debating over how much of the workforce needs to be cut. Based on how he was feeling as of this very morning (could change by tomorrow, you never know), Elon plans to cut 75% of Twitter employees once he’s in charge.
Maybe he thinks they’re all bots?
Or … maybe he really doesn’t want to fork up that much cash for Twitter and keep it running? That maybe, just maybe, this was all a big farce for headlines and fanfare? I mean, what do you think Elon’s ideal outcome is right now when it comes to Twitter?
If he plays along nice and lets the U.S. government block the Twitter deal on the grounds of national security, he could simultaneously get out of buying Twitter, not pay a breakup fee … and have more “free speech!” fodder to tweet about later.
It’s not unlikely. This is Elon we’re talking about here.
What do you think, Great Ones?
Y’all’ve been awfully quiet out there lately. I’m not judging, I’m just … noticing.
Everything alright? Anything you want to open up about or get off your chest?
This ain’t a therapy session, mind you … this is Reader Feedback. It’s like a cookout in your neighbor’s backyard, but you have free reign to talk $#!^ about stocks, the market and whatever else is on your mind.
But we can’t do that whole “reader feedback” thing without you, the reader, you feel me? So if you have any thoughts on today’s Great Stuff, chime in to the inbox! We’ll kick off the conversation for you:
Head on over to our inbox to share your side of the story: GreatStuffToday@BanyanHill.com.
In the meantime, here’s where you can find our other junk — erm, I mean where you can check out some more Greatness:
Editor, Great Stuff