*Note: Your next issue of Cabot Profit Booster will arrive next Wednesday, January 22 due to the market holiday next Monday, January 20 in observance of Martin Luther King, Jr. Day.
Interest rate worries continued to weigh on the market last week as the S&P 500 lost 1.6%, the Dow fell 1.5%, and the Nasdaq declined by 2.3%. This week will have plenty of market-moving events, including the start of earnings season, so expect continued volatility.
The Stock – Robinhood (HOOD)
The broad market has turned quite weak in recent weeks (small caps are down 12%, equal-weight big-caps are off 8% from their highs), which has dented most big-cap stocks—but Robinhood has been an exception, which is noteworthy given that it’s probably the most “risk-on” of its Bull Market stock peers.
The firm first got a name for itself during the meme stock craze in 2021, which obviously ended badly, but Robinhood continued to expand its offerings to appeal to a wider group of investors (expanding into Europe; index and futures trading, and crypto trading in Europe; new trading platform, etc.) as well as many unique products ($60 annual Gold subscription brings higher money market rates and better trading tools; there’s also a Gold credit card offering 3% cash back) and incentives (including 3% IRA matches for Gold members if you stick around for five years, which has helped retirement assets grow from near nothing a year and a half ago to $10 billion now) that have brought in a stream of new customers (24.3 million clients in Q3, up 4.3%) and assets ($152 billion, up 75%).
Of course, big-picture investor sentiment picking up has also helped, but the bottom line is that 2024 was Robinhood’s coming out party: Net deposits through Q3 of last year totaled $34.4 billion, up 175% (!) from the same period in 2023, while trading volumes for options (up 47%), equities (up 65%) and crypto (up 112%) in Q3 soared, leading to a solid 72% gain in transaction revenue. To be fair, interest income is a big piece of the pie here, so that could fade if rates come down—but, obviously, the view these days is that Fed rate cuts may be over for a while.
Of course, if the market really tanks, deposits will probably slow and asset levels could fade, but overall, Robinhood looks like an emerging blue chip of sorts in the brokerage field – one that’s likely to get a lot bigger over time.
Technical Analysis
HOOD originally broke out last February, though it was anything but a smooth ride with some harrowing corrections along the way, especially last summer. That said, the next breakout came in early October and shares ran up nicely for nine weeks to just above 40 before the market began to run into trouble in early December. Still, while HOOD saw a big initial wobble (44 to 34), the stock nearly hit new highs last week and has been resting normally—far more resilient than most stocks (and all its peers). Stop – 33.5
The Covered Call Trade
Buy Robinhood (HOOD) Stock at 42, Sell to Open February 42 Strike Calls (exp. 2/21) for $4, or a Net Price of 38 or less
Static Return: $400 per covered call (10.52%)
Breakeven: 38
Covered Call Return (if assigned): $400 per covered call (10.52%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 38 or less. (In this case 42 minus 4 = 38. Or another example is you could pay 42.2 for the stock and sell the call for 4.20, which also equals 38.)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| American Airlines (AAL) | 18 | 18 | 14.4 | January 18 -- $0.90 | $0.30 |
| SoFi Technologies (SOFI) | 15.6 | 14.3 | 13.3 | January 17 -- $1.15 | $0.01 |
| Birkenstock (BIRK) | 60.2 | 57.5 | 52.5 | January 60 -- $2 | $0.20 |
| Rubrik (RBRK) | 65 | 65.5 | 56 | February 70 -- $3 | $3 |
The next Cabot Profit Booster issue will be published on January 22, 2025.
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