We Are Investment Artists! (AAPL,GLD,TSLA)


Executive Lounge, Options Trader Elite / Thursday, April 19th, 2018

We Are Investment Artists! (AAPL,GLD,TSLA)

We at Normandy prefer the use of options because of the (mostly) limited liability involved in their use, as well as the wide variety of strategies and structures they afford the interested trader to employ.

Nearly any price projection you might make has at least one corresponding options strategy available to profit from.

In short, options are, in our view, the premiere weapon for the prudent investor in this age of increasing financial and geopolitical uncertainty.

We mention this now, because we’ve clearly entered a period in which excesses in valuation and government intervention have made predicting market moves a far less quantitative operation – less scientific, if you will – and turned it more into ‘artisanry’.

The new keys to investment and speculative success reside in a number of less widely-used indicators, basic technical analysis and in-depth sentiment study, all of which we at Normandy excel in.

Give us an example, McAbby!

A look at traders’ positioning in VIX futures is instructive in this regard.

Below is a chart of traders’ speculative posture in VIX futures over the last three years. It makes clear the overwhelming shift in sentiment that occurred literally ‘overnight’ in the first month of 2018.

Have a look –

What’s clear is that the bullishness that prevailed for almost the entire period in question was replaced by an overwhelming pessimism directly after the market retreated in late January/early February. It was a decline of just over 10% on the S&P 500 – the first such retreat of that magnitude in better than two years – yet it was enough to see traders pull a complete switcheroo in outlook.

Remember: the VIX is a measure of volatility expectations. Those who short it, expect rising markets in the near term (March, 2015 to January, 2018), while the VIX longs who now dominate the market are expecting bear action in the months ahead.

What’s surprising here is the sharp reversal of the majority after such a simple correction. Yes, the market got way ahead of itself, but it also pulled back. And considering we are coming into the end of the cycle for equities – or rather, the end of this cycle within a larger super-cycle, which is also ending – we have to expect excesses on the upside that will shock everyone.

But to think a correction suddenly marks the end of the equity road seems a bit exaggerated to us.

But not to those who trade VIX futures…

As one of our first mentors in this business used to say:

Yes, the market is behaving in an irrationally exuberant manner. But are you sure you want to short it? After all, the market can remain irrational far longer than you can remain solvent.”

What to do?

So, with traders positioned overwhelmingly on the side of an imminent bear market, and the market itself pushing higher, as the following chart of the S&P 500 shows, we believe the potential exists for a Moby sea-monster of short covering in the coming days that will make shock and awe of the trauma that great uncle Redmond J. McAbby went through at the Battle of the Somme back in 1916.

This is the S&P 500 for the last six months, and as we read the technicals, there’s really nothing here to be anxious about. We have –

  1. A successful retest of the February lows (in blue),

  2. All moving averages unfurled and within days of streaming higher,
  3. Price above them all (in red),
  4. An RSI read above its ‘waterline’ (in green),
  5. MACD just days from surfacing and confirming RSI,
  6. And all of this against a background of dreadful sentiment.

So, what more could you ask for?

Before we recommend how to trade it, however, we have two initiatives to shut down.

First, on March 8th we wrote We’re All Numismatists Now, in which we took a positive outlook on the precious metals. Specifically, we recommended purchasing the GLD January 17th (2020) 132 CALL for $9.60 and selling two (2) GLD January 17th (2020) 121 PUTs for $4.90 each. Total credit on the trade was $0.20.

And today?

We’re going to shut it down, because the immediate term has gone blank for us. She could just as easily break higher as tumble, and we’d rather pocket our winnings and wait for a better set-up in the PMs going forward.

That said, the long CALL trades for $9.75 and the short PUTs for $4.00 each. Sell the former and buy back the latter and you net $1.95 in a month on zippo laid out.

That’s 1200%.

And that’s golden.

A few weeks later, on the 29th of March, we penned The Balsa Wood Festival, and suggested you consider selling a TSLA strangle: sell the TSLA May 4th 225 PUT for $12.00 and the TSLA May 4th 285 CALL for $10.40. Total credit on the trade was $22.40.

Today, the CALL sells for $18.00 and the PUT for $1.41. Buy them both back and you step out with $2.99 earned on nothing spent. That’s a three week profit of 1893%!

Our trade for the day is an attempt to cash in on the possibility of a pending equity purchase passion.

And we’re playing it using the world’s largest publicly traded company, Apple (NASDAQ:AAPL).

Have a look at the chart –

Apple is moving securely within a year-old trend channel (in red) and has lots of room to make new highs. All her moving averages are unwound and trending higher, with price above them all.

Moreover, strong support exists at 165 (in blue) and both RSI and MACD (in green) indicate a bullish future for the shares.

After January’s decline, which affected the entire market (and from which it has yet to recover), Apple went on to post new highs!

It doesn’t feel any weakness.

Apple, too, is an artist…

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Many happy returns,

Matt McAbby

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