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- The YOLO Trade
Estimated read time: 3 minutes and 47 seconds
In this week’s newsletter:
Market recap
Skills & data used this week
Top holdings: what I am buying & selling
Market Recap
YTD returns:
S&P 500: +4.16%
Nasdaq: +5.85%
Russell 2000: +7.14%
US Dollar ($UUP): -1.22%
December CPI 6.5% YoY; expected 6.5%
*yawn*
While I'm actually impressed that our trusty (lol) economists actually predicted something right, there's still a lot to unpack with this CPI report.
Allow me to explain with a chart that has been personalized by yours truly:
Do I even need to explain what this means any more? Haven't we all heard this enough by now? Eh fuck it, one more time won't hurt (let's be honest this won't be the last time).
High inflation = Fed interest rate hikes
My doodles confirmed it, we're still at really high inflation.
The Fed continues to remain hawkish at delivering on their initiative to return inflation to the "beloved" 2% mark. We ain't even close to 2%! The show goes on! No pivot!
Skills & Data Used This Week
0DTE.
...was that even English?
0DTE stands for "Zero Days to Expiration" - it's referred to options contracts that are bought the same day as they expire.
Am I going to sit here and explain what the options market is, different components like gamma, theta, time decay, etc.? No, because I think I've already lost half of you...
But I'll give it my best college try to explain what options are and how they can impact the market!
A stock option is a contract between two parties that gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period.
Call Options = the right to buy a stock at a specific price (strike price) on a specific date
Put Options = the right to sell a stock at a specific price (strike price) on a specific date
When looking at options contracts, a buyer (or seller) must determine the expiration date to which the contract will be exercised. It could be 1 day, 1 week, 1 year...it all depends on what the options market can offer and what the strategy of the investor is.
Options that are said to be "in the money" are ones where the underlying asset has a higher price than the agreed upon strike price.
Example: You purchase a call option (right to buy) for Apple @ $150 strike with expiration in June 2023. The current price of Apple is ~$135; so between now and June you are hoping that the price of Apple exceeds $150.
Fast forward to June, if the price of Apple happens to be $200 you're in luck - you have a contract to buy it for $150! Discount!
You can start to see the attraction of the Options markets. It's basically like placing futures wagers on a team to win the Super Bowl.
However, in some cases, the expiration of a call option below the strike price can lead to a decrease in the stock's price. This may happen if a large number of call options are set to expire at the same time, and holders of these options decide to sell the underlying stock in order to cut their losses. This can cause a significant increase in the supply of the stock, which can lead to a decrease in the stock's price.
Which leads me to my next point on how insane the Options market evolved over time...
Not only has options volume significantly picked up over time, but the time to expiration is usually less than 24 hours! (these are YOLO options contracts).
This extreme volume in the Options market can heighten the volatility of the market; there's a significant magnitude of contracts always waiting to be executed or expire worthless. In the blink of an eye, shit could hit the fan...
In The Account | my top holdings
$XLP (Staples), $XLV (Healthcare), $XLU (Utilities)
Despite my bearish outlook on the economy, it doesn't negate the fact that I am actually long certain things. In recessions there are certain things that can go up (or not go down as much). These 3 sectors back test well in slowing growth and slowing inflations environments.
$GLD - GOLD
What if I told you that Gold has a higher return YTD than the S&P 500? Ain't that something...
$UUP - US DOLLAR
It was a smart call to de-gross this position from my max position as its performance has been underwhelming. Currently it's at my minimum position sizing for a currency (3%) and I'm hanging onto it solely for the fact that the data suggests we are still heading into a recessionary headwind - that's bullish for the USD.
On The Radar | positions I want to build / sizing up
CHINA
Waiting. Watching. NOT. CHASING.
China will start to see accelerating growth much sooner than the US will, which is bullish for equities - eyes on $FXI, $CHIQ, $BABA, $PDD
Off The Grid | removed positions / short selling opportunities
TECH - $XLK, $QQQ, $GOOGL, $META, $TSLA
RETAIL - $XRT
HIGH BETA - $SPHB
CRYPTO - $BITO, $MSTR
HIGH YIELD - $HYG
ENERGY - $XLE, $XOP
Incrementally, I added to basically all of these shorts this week...using the gains from my longs!
Until next week....
-BW
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.