Friday selloff makes for a few changes in what I was expecting to happen on options expiry - fewer covered calls assigned and more naked puts assigned to report. Report also has a step back view at the state of the market - is it just nerves or is something broken?
Portfolio News
The new week starts with biggest fall in the Dow since October 2020. From record highs last Thursday to the biggest fall in 8 months in just two days of trading is a bit unnerving.
I wrote last time about the nerves the market is showing - one day happy and one day sad. I also questioned a few posts back about the old maxim, "sell in May" which appears to be missing in action. I wrote also about Jerome Powell continually talking about "transitory" inflation. When those June inflation numbers came out at 0.9% vs an expected 0.5% this is what happened.
The market barely budged, since there appears to be an overwhelming consensus—reinforced by the Fed numerous times—that higher inflation is merely transitory and in fact, welcome, given the Fed's desire to see inflation average well over 2% a year for a few years.
I also read a Wall Street Journal article suggesting the record stock rally goes against the market's phobia about optimism. The adage goes that when investors sentiment gets too buoyant is the time to sell. The 2021 surveys are all showing booming sentiment yet markets continue to boom. There is no doubt that the strong blend of fiscal stimulus and easy money is underpinning the market. This may have been reinforced by the entry of a new cohort of retail investors bored with work from home life and awash with spare cash on which they can get no returns in normal channels. It is also hard to look back at the 12 and 18 month ago data and draw consistent conclusions - the data has been twisted by the pandemic effect.
The Wall Street article digs a little deeper to look at market breadth - as of July 15 only 49% of the S&P500 stocks were trading above their 50 day moving averages. This is bothersome to mainstream investors - high optimism and narrowing breadth. Maybe a quote
Markets are just doing their own thing. Something has changed. Whether it's unprecedented stimulus or maybe there is this generational change with young investors, this new surge into the market keeps driving stocks higher
Jason Goepfert, Sundial Capital Research, from the WSJ article
When markets get a bit messy like this, I like to step back to read Scott Grannis's Calafia Beach Pundit. He has been writing for some time about the unprecedented growth and size of M2 money supply. I will borrow one of his charts - this is a semi-log chart of the growth of US M2 money supply.
The right hand side of the chart shows a bulge in growth with supply breaking above trend - during the pandemic this was not a problem as people stockpiled money. As the economy opened the desire to keep stockpiling reduces and the money has to go somewhere - I have paraphrased Scott's words
- Repay bank loans
- Federal Reserve starts selling its stockpiles of bonds
- Spend more
The retail numbers show more spending. The inflation numbers show more spending. The Fed has said they will not be tapering until sometime next year. That just leaves more spending = more inflation. This may not be transitory - the supply and demand model is saying it is real.
Another chart that Scott Grannis uses shows the level of real and nominal yields on 5-yr Treasury securities, and the difference between the two (green line) which is the market's expected average rate of inflation over the next 5 years.
This is suggesting that expected inflation is above the 2% target rate and rising - not transitory at all. Now the bond market is not pricing things this way - normally when inflation is rising, Treasury yields rise too - i.e., bond prices fall. This is not what is happening - even the bond markets have bought into the transitory story. OR they have become spooked by the covid-19 infection rates doubling and their impact on GDP
Charts from Calafia Beach Pundit https://scottgrannis.blogspot.com/
This is why I have started to pick away at a few interest rate trades and keeping going on the gold and silver hedge trades.
Bought
Friday's selloff dragged quite a few stocks into assignment especially in marijuana, European banks, and silver mining
Aurora Cannabis Inc (ACB.TO): Canadian Marijuana. Assigned on a naked put at 12% premium to closing price of $8.89. I have a significant holding now for the long haul. Just hope that the company stays solvent - a few have not.
Commerzbank AG (CBK.DE): German Bank. Assigned on a naked put at 4% premium to closing price of €5.48. The two German Banks have been a great way to run income trades (both calls and puts) as the price seems to go nowhere fast.
Deutsche Bank AG (DBK.DE): German Bank. Assigned on a naked put at 0.04% premium to closing price of €5.48 - literally four tenths of a cent shy. Breakeven for the trade after accounting for the naked put premium is below that closing price.
Coeur Mining, Inc (CDE): Silver Mining. Assigned on a naked put at 3.2% premium to closing price of $7.75. Silver and silver mining took a hit in Friday trade - this counter has been sitting above the sold put strike all month until expiry day.
Hecla Mining Company (HL): Silver Mining. Assigned on a naked put at 4.6% premium to closing price of $6.69.
Cameco Corporation (CCJ): Uranium. Assigned on a naked put at 7% premium to closing price of $16.83.
First Solar (FSLR): Solar Power. Assigned on a naked put at 0.6% premium to closing price of $83.49. As price rose during the month, I added to the naked puts leaving 3 open at expiry. Combined premium received from those brings breakeven price down to $80.46, 4% below closing price.
Star Bulk Carriers Corp (SBLK): Bulk Shipping. Assigned on a naked put at 15% premium to closing price of $17.34. Added to the averaging down trade I made on Friday, this is going to hurt for a while - it really swings on the pandemic recovery gaining momentum. That said, two months of income trades brings breakeven price down to $17.86, a more modest 3% premium.
United States Steel Corporation (X): US Steel. Assigned on a naked put at 0.5% premium to closing price of $21.89. The net premiums received on two naked puts brings breakeven on this holding to $21.20 - 3.2% below Friday's close. I note that Jim Cramer added to Nucor (NUE) in Monday trade. As this is my version of the Nucor trade I am not unhappy with this entry.
3D Systems Corporation (DDD): 3D Printing. Assigned on a naked put at 36% premium to closing price of $25.30. Naked put premiums received this month brings this down to 25% premium. This is an example of how not to chase a price too tightly with naked puts when price rises on deal news. The market over reacted to the news and price fell back. Long term income trades have more than made up for potential capital losses on this assignment. 3D Printing is still a baby industry with lots of upside.
Sold
Randstad NV (RAND.AS): Europe HR Services. Assigned on a covered call for 6% profit since March 2021. I have been writing covered calls on Randstad since March 2019 and have had the stock assigned 8 times typically every 3 months. Only two of these have been at (small) losses and covered call income is almost double capital profits. I have only ever bought a covered call back once. As Randstad is strongly tied to the Europe reopening trade, I will replace the stock.
JinkoSolar Holding Co (JKS): Solar Power. Assigned on a covered call (2 trades at different strikes) for 14.8% blended loss since November/December 2020 and January/June 2021. Half the shares in the tranche were sold at a profit following June 2021 averaging down trade. Income trades for July expiry generated enough premium income to cover two thirds of the capital losses. In fact, I have been running income trades on JinkoSolar since December 2019 with income trades covering the capital losses by 3 to 1.
This is a solid example of doing income trades in stocks with high implied volatility but it does require a clear process and a willingness to deal with capital losses.
Global X Lithium ETF (LIT): Lithium. Assigned on a covered call for 7% profit since June 2021 - not bad for one month's work. Made 10% profit since June 2021 in another portfolio - this portfolio did have stock assigned on a naked put at 3.6% premium to $77.20 closing price, so I remain invested.
NIKE, Inc (NKE): US Consumer. Assigned on a covered call for 9.8% blended profit since September/October/November 2020. Jim Cramer idea from which he had exited some time back - his exit was premature and my profit was smaller than it could have been - I exited at $135 vs a closing price of $159.85. Income trades have contributed 58% of total profits since adding Nike in September 2020. Made 1% blended profit since October 2020/February 2021 in another portfolio. The last covered call written here was more than 1% premium.
Nokia Corporation (NOK): Network Equipment. Assigned on a covered call for 7% profit since May 2021 in two portfolios. I will replace this stock based on its 5G profile. While capital profits have been modest, income trades have delivered twice as much in profit since July 2020. Made 5.7% profit since June 2021 in another portfolio (covered call made 2% on its own)
PepsiCo, Inc (PEP): US Consumer. Assigned on a covered call for 9.3% blended profit since January/February 2021. Jim Cramer idea to enter - he remains invested.
Walmart Inc (WMT): US Retail. Assigned on a covered call for 0.01% loss since April 2021 (less than $10). Covered call income more than recovered this small loss. I remain invested in another portfolio.
Expiring Options
Two silver trades reached expiry on some or all of the legs.
iShares Silver Trust (SLV): Silver. With price closing at $23.77, 20 strike sold put leg of a call spread risk reversal expired. I can lever the trade up further by selling another put option as there are still 6 months to run on the January 2022 25/30 call spread
Quick update of the chart shows the trade set up looking for a continuation of the move up in December 2020 with the sold put (20) sitting under the lows of the previous consolidation. Price has had 4 attempts at pushing through the bought call level (25) but has failed each time
Pan American Silver Corp (PAAS): Silver Mining. 38/45/28 call spread risk reversal reached expiry and was assigned on a sold put at 3.2% premium to closing price of $27.11. This is a first time holding of this stock, often regarded as the Rolls Royce of silver miners. As the overall trade trade had a small negative net premium, breakeven for this stock holding is $27.70 - only 2.2% above closing price.
In TIB522, I set out the rationale for the trade as a way of playing the silver short squeeze.
A quick update of the chart shows price only once touched the bought call strike (38) in week 4 of the trade. I did write in TIB522, that I was happy to own the stock around $28 - it is the bottom of the consolidation zone. I also said that maybe the smarter way to play the short squeeze was to just sell the 28 strike put option as naked. Hindsight suggests that was right. Market insight was telling me then to take a share in any upside as a hedging trade.
Income Trades
Covered Calls
In my pension portfolio, of the 62 covered calls written (UK 5 US 43 Europe 12 Canada 2), 6 were assigned
In my other portfolios reported, of the 37 covered calls written (US 28 Europe 8 Canada 1), 4 were assigned
Naked Puts
In my pension portfolio, of the 26 naked puts written (US 23 Europe 2 Canada 1), 10 were assigned
In other portfolios reported, of the 14 naked puts written (US 12 Europe 1), 2 were assigned
Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas
Images: I own the rights to use and edit the Buy Sell image. News headlines come from Google Search. All other images are created using my various trading and charting platforms. They are all my own work
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July 16, 2021