Facebook Boycott: Here We Go Again

If the Cambridge Analytica fiasco, one mishandled public relations incident after another and numerous earnings calls that went down as some of the biggest blunders in history wasn’t enough, now enter an international advertising boycott. Here we go again, Facebook (FB) investors have been through a lot over the past two years. Now another challenge is confronting the company via an advertising boycott that’s growing into the hundreds of multinational companies. This challenge may weigh heavier on the company since this boycott will directly impact revenue as expenses swell. The magnitude of this boycott will inevitably influence the stock price as this movement grows in numbers and duration. If Facebook can appease advertisers in a timely fashion, then this may be a temporary challenge. However, as advertising spending is abandoned indefinitely due to this boycott and overall spend slows due to COVID-19, this culmination could cast uncertainty around its stock valuation. Thus far, over 400-plus brands have fled Facebook.

Boycott Growing In Numbers and Duration

International household names such as Adidas, Best Buy (BBY), Clorox (CLX), Ford (F), HP (HPQ), Starbucks (SBUX), Coca-Cola (KO), and Verizon (VZ) have joined the advertising boycott across Facebook and its platforms. Companies are jumping on the bandwagon daily, including a significant recent addition of Microsoft (MSFT). Total advertisers that have abandoned Facebook and its Instagram properties have now ballooned to over 400 organizations. With an undefined timeframe of how long these advertisers will stay away from Facebook may dampen revenue expectations. Another complexity that may arise is the ability to appease the collective group of advertisers in order to bring all of these companies back to the platform. Continue reading "Facebook Boycott: Here We Go Again"

10 Options Trading Rules That Must Be Followed

Despite the COVID-19 backdrop, some individual stocks and broader indices have exploded to new all-time highs and retraced previous all-time highs, respectively. Since the depths of the COVID-19 induced sell-off in late March, the markets have experienced an uninterrupted resurgence. It’s easy to become complacent when markets are roaring higher. However, one must remain disciplined when managing risk, especially as it relates to options trading. Mitigating risk and maximizing returns is paramount as the markets rotate out of the depths COVID-19 sell-off. Options trading offers the optimal balance between risk and reward while providing a margin of downside protection and a statistical edge. Proper portfolio construction and optimal risk management is essential when engaging in options trading as a means to drive portfolio performance. The Q4 2018 and the COVID-19 pandemic are prime examples of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation and selling options to collect premium income are keys to an effective long-term options strategy.

An Effective Long-Term Options Strategy

A slew of protective measures should be deployed if options are used as a means to drive portfolio results. One of the main pillars when building an options-based portfolio is maintaining a significant portion of cash-on-hand. This cash position provides the ability to rapidly adapt when faced with extreme market conditions such as COVID-19 and Q4 2018 sell-offs. When selling options and running an options-based portfolio, the following guidelines are essential (Figures 1 and 2):

      1. Trade across a wide array of uncorrelated tickers
      2. Maximize sector diversity
      3. Spread option contracts over various expiration dates
      4. Sell options in high implied volatility environment
      5. Manage winning trades
      6. Use defined-risk trades
      7. Maintains a ~50% cash level
      8. Maximize the number of trades, so the probabilities play out to the expected outcomes
      9. Continue to trade through all market environments
      10. Appropriate position sizing/trade allocation

10 Options Rules
Figure 1 – Defining the 10 rules that one must follow to appropriately manage risk and maximize returns when deploying options as a means to drive portfolio results
Continue reading "10 Options Trading Rules That Must Be Followed"

COVID-19 - Capitalizing On Opportunities

Just before the COVID-19 pandemic struck the markets, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect, but they were ill-advised in what was an already frothy market with stretched valuations prior to COVID-19 hitting the markets. The COVID-19 pandemic was a true back swan event that no one saw coming as far as its abruptness, scale, and impact. This COVID-19 induced sell-off was the worst since the Great Depression in terms of breadth and velocity of the sell-off.

The S&P 500, Nasdaq, and Dow Jones shed a third or more of their market capitalization through late March 2020. Some individual stocks lost over 80% of their market capitalization. Other stocks were hit due to the market-wide meltdown, and many opportunities were presented as a result. Investors were presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I took long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It was important to put this black swan into perspective and see through this event on a long term basis. Viewing the COVID-19 sell-off as an opportunity to buy stocks that only comes along on the scale of decades has proven to be fruitful. When using past recessions as a barometer, I started buying stocks when the sell-off reached 15% and continued buying into further weakness to improve cost basis.

Most Extreme and Rare Sell-Off Ever

Out of the 12 recessions that have occurred since May of 1937, the average sell-off for the S&P 500 was -31.6% with a range of -57% (2008 Financial Crisis) to -14% (1960-1961). The COVID-19 pandemic has crushed stocks beyond the average recession sell-off of -31.6%. The markets didn't reach the most severe sell-off levels by historical standards despite the possibility for more downside potential. Regardless, at initial recession levels of 15% declines, I began putting cash to work as that was the prudent action for any long-term minded investor. Continue reading "COVID-19 - Capitalizing On Opportunities"

Options Trading - Diagonal Put Spreads Part 2

Leveraging a minimal amount of capital, mitigating risk, and maximizing returns are paramount as the markets rotate out of the depths COVID-19 sell-off. Options trading offers the optimal balance between risk and reward while providing a margin of downside protection and a statistical edge. Proper portfolio construction and optimal risk management are essential when engaging in options trading as a means to drive portfolio performance. The Q4 2018 and the COVID-19 pandemic are prime examples of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation and selling options to collect premium income are keys to an effective long-term options strategy. A risk-defined diagonal put spread optimizes the risk management aspect of an options trade while maximizing return on investment.

Minimizing Risk and Maximizing Return

Leveraging a minimal amount of capital and maximizing returns with risk-defined trades optimizes the risk-reward profile. Whether you have a small account or a large account, a defined risk (i.e., put spreads and diagonal spreads) strategy enables you to leverage a minimal amount of capital which opens the door to trading virtually any stock on the market regardless of share price such as Apple (AAPL), Amazon (AMZN), Chipotle (CMG), Facebook (FB), etc. Risk-defined options can easily yield double-digit realized gains over the course of a typical one month contract (Figures 1, 2, and 3).

Options Trading
Figure 1 – Average income per trade of $190, the average return per trade of 7.3% and 95% premium capture over 41 trades in May and June
Continue reading "Options Trading - Diagonal Put Spreads Part 2"

Options Trading - Diagonal Put Spreads

Balancing the trade-offs between risk and reward is front and center even as the markets recover from the depths COVID-19 induced sell-off. Options trading can offer the right balance between risk and reward while providing a margin of downside protection and a statistical edge. Proper portfolio construction and optimal risk management are essential when engaging in options trading as the main driver for portfolio results. One of the main pillars when building an options-based portfolio is maintaining a significant portion of cash-on-hand. This cash position provides the ability to rapidly adapt when faced with extreme market conditions such as COVID-19 and Q4 2018 sell-offs. The COVID-19 pandemic is a prime example of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation and selling options to collect premium income are keys to an effective long-term options strategy.

Minimizing Risk and Maximizing Return

Leveraging a minimal amount of capital and maximizing returns with risk-defined trades optimizes the risk-reward profile. Whether you have a small account or a large account, a defined risk (i.e., put spreads and diagonal spreads) strategy enables you to leverage a minimal amount of capital which opens the door to trading virtually any stock on the market regardless of share price such as Apple (AAPL), Amazon (AMZN), Chipotle (CMG), Facebook (FB), etc. Risk-defined options can easily yield double-digit realized gains over the course of a typical one month contract (Figures 1, 2, and 3).

Options
Figure 1 – Average income per trade of $184, the average return per trade of 7.4% and 95% premium capture over 38 trades in May and June
Continue reading "Options Trading - Diagonal Put Spreads"