Since we won't be streaming this week as a result of a time conflict with the Super Bowl, I figured it'd be helpful to essentially create a write-up recapping what we did last week and what we're looking ahead to for the upcoming week in the market.
For starters, here is how we performed last week:
We made $6,727 and took home a 4.29% return on a week where the S&P 500 dropped -1.84%. Outperforming by 6.13% That objectively is an awesome week. Now things could have been waaaaaay better for us had it not been for the disaster AFRM had after they presented earnings on Thursday. We'll talk about that in a second but after being in a significant hole to start the year and being down over 30% at one point, we're now only down 9.77% compared to the S&P 500 being down 7.26%.
And when you think about some of the absolute disasters that we've had to endure between DKNG, AFRM, RBLX, FUBO, and PLTR, I can objectively say that we've done a really good job holding up against some dramatic drops on the stocks that we're holding.
But let's talk quickly about AFRM, which was the disaster of the week. And after topping out at 83.57 before closing at 46.55 the next day, I don't think "disaster" is too much of a misnomer. Any time you have that sharp of a drop overnight, you're going to be looking at some red numbers. That's a given. But here is what we did to try and mitigate the damage.
For those of you who have been following along with us, you'll know that headed into the week we held an AFRM -15 3/18 55p position that carried a breakeven price of roughly 52.50. With earnings this past week, we knew that we were looking at a pretty volatile event and having a strike price that went all the way out to March meant that if anything crazy happened during earnings, we wouldn't really be able to actively do anything to manage the position. So for that reason we rolled the entire position to a 2/11 expiry to take advantage of the earnings premium. We closed the original 55p (for a slight profit!) and then sold some 2/11 57p. Figuring that would be decently safe with AFRM above 80/share. But as is typically the case, there is no such thing as easy money.
We sold the 2/11 57p for $0.55, and at one point Thursday afternoon they were down to $0.15 after AFRM had mistakenly tweeted earnings results. Of course the tweet had cherry picked the better parts of the earnings report so it looked like good news and we thought that we would be able to ride them out for max profit. This turned out to be a roughly $11,000 mistake for us.
Earnings provided an insane move to the downside and we had to play defense. So what do we always try to do when we play defense on a stock? Roll down and out for a credit. We were able to accomplish this by rolling down to a 50p and out to a 3/18 expiry (which was the original expiry anyways).
Had we closed out the 2/11 57p Thursday afternoon for $0.15, we would have profited 40 * 15 = $600 on that position. When we rolled down and out we ended up closing the 57p for $5.32, which resulted in a $7,155 loss on that individual position. The 3/18 50p we rolled down to also managed to lose another $4,000 by the end of the day. It was a tough way to end the week, but as always this loss is just on paper for now. By rolling down and out, we reduced our breakeven price from $52.23 to $48.46. That's about 10% lower just by moving a couple of pieces around right before earnings. We will definitely be keeping this type of a trade in mind for RBLX as they get set to announce earnings this week.
With all of that said, here is how the current trade looks:
We have been in AFRM for ONE MONTH and it's dropped 42.55%. That is insane. Yet despite all of that, we've got a 48.46 breakeven price as we head towards the March expiry date. Our biggest mistake here was starting with 15 contracts off the bat. Beginning with half of that and then doubling the position to "full size" after a disastrous week is generally the best advice. But any time we see this big of a drop in the stock and we're still in the game, it's a win. The analyst price targets I've seen so far for AFRM are 45, 85, 100, and 140(!!). So to hold a position at 48.46 seems to be far from the end of the world. If we can do the damage we've done to our breakeven price in just one month, imagine what we can do for the remainder of the year. As always it sucks to lose money temporarily, but I'm far from worried about this one.
If you're not currently in on AFRM, the opportunity right now is incredible. IV is still sky high from the big drop and you can get significant option premium all the way down in the $30's! Even the 3/18 35p offer what comes out to a little over 1% RoR per week.
Since we just alluded to it, let's talk about it. RBLX is another "Long-term CSP" trade that we initiated around the same time as AFRM when we sold 4/14 70p. And again this is another where I think I made a couple of mistakes. The first was similar to AFRM where I started a little too big with position size. The second mistake was selling April expiry, which was about 80 days away when we entered into the position. Theta decay for OTM options actually begins to accelerate around the 45-60 day window, which is what I was targeting, but just jumping straight into the March expiry probably would have been a better idea here. But we'll keep a note of that and do better next time.
This is another stock that has taken a huge dive on us as it's fallen from 95 to 66 in just about a month's time. And while this really isn't typical, these types of things happen so it's important to know how we plan to manage it. It's easy to have stocks go the direction we want and sit back while we take home profit week after week after week. Our success, however, comes from how we navigate situations like these.
One item we always want to consider is the "sunk cost fallacy". If you didn't have any money in the market at all right now, is the position you're currently in a position that you would open? For me we can look right back to the first paragraph of this section to see that the answer is no. I regretted selling 15 contracts off the bat. So instead of letting that mistake ride and potentially compounding a bad decision, I cut the position in half last week. Here is what it currently looks like:
We'd be down $4.3k if RBLX finishes at the current price, but (1) this won't be the only RBLX trade we have on the year so we can very easily get this back to breakeven, and (2) they have earnings this week which should provide an opportunity for us to pull off something similar to what we did with AFRM.
They report on 2/15 (Tuesday) after hours, so I won't be touching this position until Thursday afternoon, but 50p seem like a decent option for when I do. The MMM is +/- $12, and with RBLX closing at 66.81 on Friday, that would suggest the low end of the range is $54. I will say though that I am a little conflicted here. We've seen some really solid earnings from companies that have been beat down. RBLX definitely falls into that category. They've also announced several recent partnerships, one of which with the NFL. That all is really bullish to me and I like the company in the long run. However we've also seen how bad earnings can get, specifically with AFRM last week. So I think the smart move here is to just hold the position we currently have as we head into earnings, and then increase the position if they don't report great earnings.
If RBLX does report good earnings and the stock runs up a ton, that's good because our -7 70p that we currently hold will bring home about $5,000 for us. If the perform poorly, we can use that as an opportunity to scale back into the position with some strikes potentially in the $40's depending on how far they potentially drop.
If you're not in a RBLX position I think it's a solid long-term trade and the 50p for earnings should provide a decent entry provided that you again follow the advice to maybe open 50% of what you'd fully be comfortable with so you have flexibility to play defense against a big drop.
This trade has been an awesome example of using the HT wheel to ride the waves, taking advantage of solid option premium, and staying patient as we continuously lower our breakeven price week after week.
In fact, this is what our breakeven tracker looks like:
We've followed the HT Wheel strategy almost perfectly here. Started with a position that was 50% of what we'd be comfortable with, entered into covered strangles, got assigned on those, and then continued to sell covered calls and the result is a breakeven price that's 34.19% lower than what the stock was at when we originally started trading it a couple of months ago.
DKNG is another name that presents earnings this week, revealing results on Friday morning. Because of that, there was some decently inflated option premium on it and the only big decision we really had to make here was what strike we wanted to sell. Do we go further out of the money for less premium and more upside, or closer to the money for less upside but more option premium?
We chose option B here. Why is that? First and foremost, there are two very bearish events potentially hanging over the market this week. The first of which is the rate hike situation. The Fed is holding an emergency meeting on Monday and some may believe we see a surprise rate hike on Monday. Rate hikes are not good for the market. The other situation is the potential Russia/Ukraine conflict. War doesn't seem to be terribly great for the market either. So with that in mind we always want to be mindful of our downside risk and selling the more conservative strikes and collecting as much premium as we can from covered calls will accomplish that.
Another factor is that we've stuck with this DKNG trade for a couple of months now. Here is what it currently looks like:
The $1.15 of premium we get from the 24.5c takes our breakeven price down to 23.69 and allows us, for the first time in a while, the opportunity to finish the week profitable overall on our DKNG position. As you can see above it also guarantees $2,300 in option premium since we'll collect that call premium no matter what. That's exactly the type of position I want when the market is looking shaky. Downside protection is the name of the game right now and I would hate for all of the progress we've made on DKNG experience a setback because I got too greedy with the covered calls I sell.
If you're not in DKNG currently, there are some incredible options available. The 20p offer 2.25% RoR, and you can go all the way down to 18.5p before you get less than 1%. PENN reported earnings a few weeks ago and the numbers weren't anything crazy (good or bad). I think we can potentially use that as an indicator to hint at the fact that we're not going to see anything like an AFRM-type move on DKNG here. Because of that I would be comfortable even selling puts closer to the money on DKNG for earnings at the 22 or 22.5 strike, both of which offer >5% RoR. That's massive. With sports betting gaining adoption in different states around the country, it's an industry I want to be invested in.
Not a ton to talk about with this one, but they also report earnings this week. Here is what our ride down the PLTR rabbit hole has looked like:
The result is a loss of around $10k for us so far, but that's kind of expected when we have a decent position in a stock that has fallen 47%(!!!) since we first jumped in on it. On rows 24 and 25 you'll see when we dumped the shares to switch to selling 13.5p since there wasn't a ton of call premium on covered calls and we felt it was smarter to "hit the reset button" here and start over. Since then the price of PLTR shares has dropped from 13.8 to 13.13. With 2,000 shares that would be a loss of $1,340. By selling the 13.5p week after week after week, we've come away with a profit of $1,480 over that time period. And that's not counting that $1,400 of profit on the bottom row because that's from this week's 13.5p position. That's a pretty significant difference between those positions and a great example of how sometimes we don't need to try to make back the entire loss in a week or two and we're better served in the long run by just going with the trade that we objectively feel is the best each week.
We briefly considered 14.5p because I think PLTR could really see a nice recovery if they report solid earnings, but again with the fed and potential war looming, we want to be conservative this week. So 13.5p it is for us.
And that's pretty much everything we have in play as we head into this week. We also initiated a small position in CRSP to add a little diversity with a stock that we like to play on downturns and would be comfortable holding long-term. We undoubtedly have a pretty short list of stocks that we're in and the positions we've taken are heavily protected by conservative strikes that offer significant option premium. In fact, we stand to make about $5,000 this week just from option premium alone:
That's the type of cushion that will help us outperform in the long run if the market continues to fall.
But again, we've got a pretty short list. With IV spiking across the market, this is typically a pretty good time to strike. So let's take a look at a few names that should be good options for the upcoming week.
SPLK: Headline came across Friday afternoon that Cisco put out a $20B+ takeover offer for the company. They had a share price of $114.51 at close on Friday and a market cap of $18B. A $20B mkt cap would put the share price at 127.23. So with the vague "$20B+" phrasing, that seems like the low end of a potential takeover amount. No idea what the options will look like on Monday morning but this could be a really nice IV reversion trade opportunity that basically replicates the ZNGA trade we made a few weeks ago.
PYPL: 2/18 110p look awesome here. Stock closed at 115.29 on Friday and has a MMM of +/- 4.81. 110 strike slides in nicely below that while still offering 1.38% RoR. Additionally, PYPL has an 180d RSI of 27.08 (oversold) and the IV percentile is 96% (meaning that PYPL's current IV is higher than 96% of the days in the last year). Those 3 metrics make this trade seem like a homerun to me. The Covid crash low for PYPL was in the $80's and that's the lowest it's traded in the last 3 years by far, so this one may also set up nicely for a 60 DTE cash secured put if you're looking for one of those.
NEWR: Big post-earnings drop but has fallen back to a level that should act as support (3 instances circled).
I have quite honestly never heard about this company before today but the numbers look nice, RSI is super low, and we can see from the screenshot above that the IV percentile is at 89. The 65p for 2/18 offer about 0.62 of premium which is right around 1% RoR. If you want to get a little more aggressive the 70p offer 2.15% RoR but I'm not sure 2x RoR is worth sacrificing a $5 price cushion.
T: This stock performed decently in the face of the January selloff as investors hurried to pile into perceived "value" stocks ahead of the Fed rate hikes. It skews slightly oversold with a 43 RSI on a 180d basis, but the value here comes from the elevated IV as the stock sits with an IV percentile of 91. I think the 2/18 23.5p are worth taking a look at for a decent cushion and entry price on a historically stable stock. It offers 0.75% RoR
I also don't hate the idea of playing some of the "crappy" stocks in a crazy time like this. WISH 2p offer 2% RoR and RIDE 2.5p are similar for 2/18 expiry. Sometimes the stocks that offer the biggest cushions are the ones that can help the most during uncertain times like these.
Stay safe out there, keep cash on hand, and do everything you can to protect your capital. There isn't a day that goes by without a little uncertainty in the market but as long as we protect our capital, manage position sizes, and trust the process, we're going to be winners.