Stock Market-Liquidity Providers Win Again! Did You Get Our Best Strategy This Week? Must Read!

May 13 2022 Option Professor Observations & Opinions

IMPORTANT! Before we get into the updates this week….we feel it is important that we REMIND everyone about the QUICK ALERT sent to everyone on THURSDAY this week AND the LEARNING OPPORTUNITY. Within the ALERT; we said it was time to understand the CALL SPREAD RISK REVERSAL options strategy. In short; the trader SELLS an out of the money PUT (cash secured) and RECEIVES the premium for agreeing to buy the stock at a discount (lower strike price than current price). The trader uses that premium and BUYS a Call Spread above current prices. In the last 48 hours; this has been an outstanding idea so far. The risk of loss is the stock trades UNDER your put strike price which in turn is your cost basis if put stock

IMPORTANT-There is no option strategy that is right for everyone. You need to LEARN & UNDERSTAND. The OPTION PROFESSOR has a 30 minute one on one Q & A SESSION where you can GET EDUCATED!

Let’s get into what happening now. WHY DON”T THEY TELL YOU TO SELL? Not too many people in the investment world have a vested interest in having investors roll 90 day Treasury Bills or limit your sectors. Whether it be TV stations wanting your eyeballs every day, investment firms wanting your accounts and fees or newsletter writers who have charged an arm and a leg for information that is losing you money.

This has been our view; The BOND market peaked in March 2020 and after we broke 1.75% on 10 yr Treasuries we have been off to the races for higher yields (that was November 2021 also when the Fed PIVOTED to fighting inflation). The Fed is no longer buying Treasuries & Mortgages (mortgages up 50%+ from the 3’s to the 5’s). More concerning; the corporate and municipal bond markets are dealer markets which means companies that provide liquidity are now responsible to provide liquidity in the event of an avalanche of selling should a chunk of debt issued in the last 12 years of low interest want out as they see their coupon is low and their principal is going in the tank. Junk Bonds, EM Debt, Munis, Preferred’s, Short Term Bank Loans and others could have issues if the Fed normalized rates to an inflation rate of 5% to 8%. Do you think an economy with this tight labor market and consumer balance sheet will need just a 2-2.5% fed funds rate to slow it down? Do you think the Fed is kidding about getting cooling demand & labor? In this environment rolling a 0-24 month Treasury ladder or Ultra Short Term (1 yr duration) made sense.

Our view on most of the STOCK MARKET has been that SPX PEAKED in 2021 essentially and with cheap money GONE and inflation UP; VALUATIONS were coming DOWN. They certainly have done that and we noted that during inflationary times the P/E ratios can be 14X-16X and the 25 yr LT average is about 15. AS we said; SPX earnings expected $2.30 this year so at 17X =3910 (we’re here!) 16X =3680 14X=3220. Some sharp people believe the LOWS come when we get capitulation (VIX 40-50+) followed by news (Fed rescue or something?) followed by bad earnings that see the stocks rise afterward….a lot missing here? Our view has been the Energy, Food, Staples Utilities, and Dividend Payers has been the best places to be. RECESSION RISK- Here’s the rub.. we hear recession risk is 30% for ’23 BUT historically when we have seen Unemployment Rates UNDER 4% and Inflation ABOVE 4%…historically Recession Risk could be like 100%! Rising Tides can lift all boats but an iceberg can be tough to negotiate.. the 2nd half of ’22 could be great IF Inflation DECLINES & the Fed has to do less not more…..if it breaks bad…LEARN how hedging works!

We are on the look out for a COMMODITIES PEAK in 2022 as a slower economy and changes in the supply demand dynamic could leave some people holding the bag. Right Now; there is talk of shortages of oil (Russia-refineries), shortages of agriculture (War-Weather-Fertilizers-Stockpiles), Industrial Metals and the prices are very high. BUT we have noticed the Goldman Sachs Commodity Index high point (2008) in intact and some stock in agriculture (CF ADM MOS) made their highs in April and in Oil (HAL SLB XOM) they did as well. The metals (CLF X NEM) also saw their best days in April so unless a parabolic hyper inflationary prices lies ahead & we will then see if Commodities are also a Fed tightening casualty.

The OPTION PROFESSOR Created PDF REPORTS “How to HEDGE Market Declines & Upside SURPRISES” AVAILABLE NOW! Have an EASY 30 minute one on one Q&A Session with the Option Professor where you LEARN MORE–Option Strategies, Indicators, REVIEW your strategies/what choices/questions & MORE!

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We look forward to sharing our Knowledge and help you EDUCATE YOURSELF!


The Option Professor

Remember All investing involves a risk of loss and is not right for everyone. CONSULT YOUR BROKERAGE FIRM /broker to determine your own risk tolerance and suitability. Past performance is not indicative of futures results. Information & Opinions are for information purposes only It is NOT advice

Jim Kenney

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