The S&P 500 is down 0.5% this morning, though well off the overnight lows (lower by 1.25%) following news that Gary Cohn, President Trump’s top economic advisor, is leaving his position.
As the market has heated up, I’ve received many great questions from subscribers. I thought I would answer some of these questions with the bigger group. (Please keep your comments and questions coming!)
Question: Did I miss something, or are you telling us to sell half of the initial half position you suggested we purchase last week? When will you tell us to purchase the other half position?
Your question is a good one. Unfortunately—or fortunately—I picked the bottom on Friday as the market was down 4% in four days. I went conservative, intending to buy more INTC or MU on Monday. But the market and these stocks exploded higher and I missed on the second buy. The upside, of course, is that we locked in a quick profit of approximately 40%. The downside is that it was on a smaller position than I’d hoped.
When the market is moving 1% a day, there will be mistakes. In this case, it was a good mistake.
We will see how the market handles this morning’s selling pressure. I may re-buy, or just sit on my hands.
Question: What is your interpretation of the VIX in the last couple days?
The VIX has been bouncing between 16-25 for the past week. And for the three days this week, it’s been trading around 18-19. As I wrote on Monday, I would not anticipate the VIX trading lower than 16 for the time being. I say this for a couple reasons:
- The market has been making 1% moves every day
- Fear of a trade war
- Fear of rising interest rates
- Gary Cohn’s departure and what it means
- Jobs report on Friday
That is a heavy list of concerns, and traders are likely hedging more and more because of that. Though I would note, for now, the market is handling those uncertainties fairly well.
The next question came in response to the covered call ideas I sent in this morning’s email.
Question: Couldn’t pass this one up, but I don’t understand the math:
Buy Baozun (BZUN) Stock at 48.2, Sell July 50 Calls for $6
Static Return: 14.21%
Breakeven: 42.2
Covered Call Return (if assigned): 18.48%
I bought at 45.42 and sold calls at $5.14. How do you figure the static and assigned returns?
BZUN is lower by $3 this morning following a downgrade. So this subscriber got better prices than I suggested. I will use the price he got, to show the math.
This is the subscriber’s breakdown:
Bought Baozun (BZUN) Stock at 45.42, Sold July 50 Call for $5.14
Static Return: 12.76%
Breakeven: 40.28
Covered Call Return (if assigned): 24.13%
The breakeven is at 40.28 (45.42 – 5.14).
If the stock doesn’t move from 45.42 on July expiration, the July 50 calls will expire worthless and he collects the $514 per call sold. So the static return is 5.14 (premium collected) divided by 40.28 (breakeven) = 12.76%
If the stock goes to 50 or above on July expiration, 100 shares of stock purchased will have gained $458. And he would also collect the $514 from the sale of the call. So that is $972 (458 + 514). Then divide money made by dollars risked 972/4,028 = 24.13%.