Editor’s Note: The market will be closed all day on Friday, Jan. 1. Because we understand that many of you will be busy preparing to celebrate the holidays with family and friends, we will not be holding a live webinar tonight. Our next live webinar will be Wednesday, Jan. 6, 2021, at 8 p.m. ET. Register here. | Are you a new member? | | 1. | Read the Blueprint for Options Success report here | | 2. | Check out our guides to Short Puts and Covered Calls | | 3. | Watch our most recent webinar here | | 4. | Watch our New Member Webinars here and here | Dear Savio, Certain things in the market are important to watch every year: wage growth, international trade, employment and inflation. In most respects, we don’t expect the major themes for 2021 to be completely different than any other year. Those four economic factors will weigh heavily on the market, but there are some unique issues from 2020 that will spill over and add to that list. In this week’s update, we will discuss three of these factors that we expect to have a significant impact on the market in the short term. Consumers We have mentioned the importance of U.S. consumers as key to higher stock prices in nearly every weekly update we published this year. The passage of a stimulus bill this week is good but the direct payments to consumers were paltry compared to the first round. That means jobs have got to start coming back at a faster pace than we have seen so far for spending to continue. As you can see in the following chart, the civilian labor force participation rate has still only regained half its pandemic losses. 
Labor Force Participation Rate – Chart Source: St. Louis Federal Reserve We are concerned that the market has mistaken the unemployment rate for joblessness. Although unemployment is back down to 6.7%, the real rate is much higher. If you are not looking for a job because you don’t think you can get one, or you went back to school, or for other reasons, you aren’t counted as “unemployed”. This is also true if you lost your high paying job and are now working a low paying job (or two) instead. Consumer spending trends are good right now, and we tentatively expect that to continue. We’re optimistic, partly because -- unlike prior economic disruptions -- consumers have been taking on less debt. For example, in 2020, debt on credit cards broke a 10-year growth streak and declined by 9%. That means there is a lot of short-term borrowing capacity to support spending in 2021. You might ask where consumers are getting the money to spend if they aren’t borrowing on credit cards? The first stimulus was a big source of spending and consumers have been borrowing against their houses. According to the Fed, U.S. consumers borrowed another $85 billion against their homes in the third quarter of 2020 to set another new record of total outstanding mortgage debt. For us, this means retail companies are still a priority for our trades in the first quarter, but we will remain flexible if the employment situation does not improve at a faster rate by the second quarter. Borrowing against houses cannot sustain this trend forever as we learned in 2008. Vaccine Now that a vaccine for COVID-19 is being distributed, we are optimistic that the pandemic's effect on the market will start to recede into the background. However, investors are still pricing in a lot of risk related to the pandemic despite the introduction of a vaccine, so we should stay flexible. For example, as you can see in the following chart of the "market fear index" – the CBOE S&P 500 Volatility Index (VIX) – investors are more fearful at the market's new highs than they were the last time. 
Weekly Charts of the CBOE S&P 500 Volatility Index (VIX) and the S&P 500 (SPX) – Chart Source: TradingView From a technical perspective, a divergence between higher highs on the stock index and higher lows on the VIX indicates the potential for fast corrections. Because news about the vaccines (and the stimulus package) has had the largest and most predictive impact on prices, we argue that the VIX’s level indicates investors are still on edge and could sell stocks if there are problems with the vaccines’ deployment or effectiveness. At its current level, the VIX indicates that investors expect volatility over the next 30-days to be 6.64% which is a lot worse than the norm of 2%-3% for a bull market. We think elevated risk levels will continue in the first and second quarter of 2021. That sounds bad, but there are advantages to it as well. First, because we are option sellers, high levels of expected volatility (AKA “implied volatility”) mean option premiums are larger and our income is higher. Second, if investors sell on short-term news, the underlying fundamentals should keep support levels strong. That means we have new buying opportunities on the dips. Brexit Do you remember the mad scramble on June 23, 2016, when the “Brexit” referendum unexpectedly passed in the UK, kicking off four years of stress and predictions about its effect on the UK economy? The UK officially left the EU in January of this year, but the final(ish) version of a Brexit deal wasn’t done until last week. For now, this leaves far fewer unknowns. Many of the issues around trade and financial transactions investors had worried about have been dealt with in the UK/EU deal so we expect minimal issues. While this should reduce the Brexit “discount” in the market, for now, the separation creates the potential for quicker changes. For example, after the new COVID-19 variant was discovered in the UK last week, French authorities closed the ports and trucks were stranded in Dover. Additionally, Northern Irish protestant groups and Scottish politicians are adamantly opposed to many of the deal’s terms which could lead to a united Ireland and an independent Scotland. Despite the remaining unknowns, it looks like the Brexit deal turned out a lot like the new “NAFTA” in that the new boss is the same as the old boss. However, because the UK is in a worse negotiating position for trade agreements, we plan to avoid sectors like automakers and oil companies with too much exposure to the UK. Although the drag on the UK economy isn’t as catastrophic as we had worried in 2016, you can see in the following chart that the FTSE UK 100 is underperforming the S&P 500 by a wide margin. The FTSE is even trailing Italian and Spanish stock indexes, and we don’t expect that to change in the short term. 
Daily Charts of the S&P 500 (SPX) Versus the UK, Italian and Spanish Stock Indexes – Chart Source: TradingView Note: We used the corresponding iShares funds to represent the international indexes for this comparison to normalize the effect of currency movements. These funds are the iShares MSCI United Kingdom ETF (EWU), the iShares MSCI Italy ETF (EWI) and iShares MSCI Spain ETF (EWP). The Bottom Line
Next week is the beginning of a new year, and we will need to start preparing for fourth-quarter earnings season. Additionally, the employment numbers for December will be released on Jan. 9. The monthly labor data is always important, but this round will be critical. Seasonal adjustments in December due to holiday hiring trends are usually quite large, and because this year was so unique, the numbers could be a lot higher or lower than expected just because of those adjustments. If the report is a lot lower than anticipated, we would expect a negative reaction in the market even if the disappointment was largely due to a statistical adjustment. Finally, the holiday weeks are usually quiet so the week after the New Year can be volatile. If prices are swinging from day to day, we recommend holding off on forming any judgments until the end of the week. Large institutional trading the first week after the holiday can make the market look worse (or better) than it is. Strategic Trades Review We have recommended several long-term positions that we are managing through long and short stocks, short puts and covered calls to take advantage of longer-term trends. When it's time to open or close a trade, we'll send you alerts via e-mail. For more info about our Strategic Trader positions, you can read trade alerts and view our portfolios. You can also see more trade-specific details by clicking on the trade links below. The strategic trades listed in the table below summarize our current level of exposure (short puts, long and short stocks, covered calls, etc.) to the stocks we have recommended and our cumulative returns to date. 
The cumulative return of each position includes the profit or loss from any exposure we have had to the stock since the original recommendation. Click here to view a short educational video that explains how and why we're tracking the trades in our Strategic Positions Portfolio this way. We’ll be discussing each of our current trades in the next live Strategic Trader webinar on Wednesday, Jan. 6. Click here to reserve your spot now. If you're new to options trading -- or if you'd like a quick refresher course on a specific aspect of options trading -- please visit our Education Center right here. We've created a large archive of high-quality instructional videos. And if you haven't checked it out yet, we also have a series of options selling courses in our Course Library.
We're confident they'll help you become a much better options trader, no matter what level you're at now. | Open Positions These are the Strategic Trader positions that are currently open and active (Charts courtesy of TradingView). 
Bank of America (BAC) – On December 30, we recommended you "sell to open" the BAC January 22nd $29 Put Write for $0.50 or better. As we mentioned in this week’s update, consumers are borrowing against their homes at record levels. At least in the short term, we expect this to keep the bulls moving into BAC, which should keep the stock above support. If you have not already established a position in BAC, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering this trade. 
Target (TGT) – On December 28, we recommended you "sell to open" the TGT January 15th $170 Put for $1.75 or better. We expect the passage of the recent stimulus bill to support consumer spending, which should keep the bulls pushing TGT higher. If you have not already established a position in TGT, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering this trade. 
The Walt Disney Company (DIS) – On Dec. 23, we recommended you "sell to open" the DIS January 15th $165 Put Write for $2.05 or better. DIS has gapped higher and is approaching another bullish breakout to new highs. We expect it to remain above our short strike price in the near term. If you have not already established a position in DIS, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering this trade. 
Nike (NKE) – On Dec. 22, we recommended you “sell to open” the NKE January 22nd $140 Put Write for $3.00 or better. NKE continues its relentless run higher. We expect the former resistance level of $140 to hold as support moving forward. If you have not already established a position in NKE, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering this trade. 
Ball Corporation (BLL) – On Dec. 17, we recommended you “sell to open” the BLL January 15th $87.50 Put Write for $1.30 or better. BLL has been pulling back slightly, but it is still well within its longer-term uptrend. We expect BLL to remain well above our strike price of $87.50 until expiration. If you have not already established a position in BLL, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering this trade. 
Microsoft (MSFT) – On Sept. 25, we recommended you take possession of MSFT common stock at $215.00 per share when our MSFT September 25th $215 Put Write expired in the money. On Dec. 7, we recommended you “sell to open” the MSFT December 31st $220 Covered Call for $2.75 or better. MSFT has broken above our strike price and reached the highs the stock established in October and November. We expect the stock remain above our strike price and our calls to expire in the money. If you have not already established a position in shares of MSFT, we recommend waiting to buy shares of the stock. If you already own shares and have not already established a covered-call position on MSFT, or are working on scaling into a position, and the option is trading at, or above, our recommended minimum price, we still recommend entering the covered-call trade. Closed Positions Starbucks (SBUX) – On Dec. 29, we recommended you buy to close the SBUX January 8th $100 Put Write. The position was closed for a return on margin of 5.66%. Coca-Cola Company (KO) – On Dec. 29, we recommended you buy to close the KO January 22nd $52 Put Write. The position was closed for a return on margin of 5.18%. Target (TGT) – On Dec. 28, we recommended you buy to close the TGT December 31st $170 Put Write. The position was closed for a return on margin of 7.63%. Apple (AAPL) – On Dec. 24, we recommended you allow the AAPL December 24th $125 Covered Call to expire in the money. The position was closed for a return on invested capital of 0.88%. Apple (AAPL) – On Dec. 24, we recommended you allow the AAPL common stock to be called away when the AAPL December 24th $125 Covered Call expired in the money. The position was closed for a return on invested capital of 0.00%. Webinar Preview: Join us Wednesday, Jan. 6 at 8 p.m. ET During tonight’s live webinar, we’ll review the weekly newsletter, discuss coming events in more detail and walk through our top trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week. And if you have any questions or comments you would like to send us in advance of the live session -- or anytime during the week -- you can write to us at feedback@investorplace.com. If you can't attend the session live, you can watch the archived version on our website in the "Webinars" section. It'll typically be posted within about two hours of the end of the live session. Sincerely, 
John Jagerson and Wade Hansen
Editors, Strategic Trader | 
Comments
Post a Comment