“Never before had there been such gambling as there was in those last turbulent years of the '20s, but few people realized they were gambling: they thought they had a sure thing." -Bernard Baruch
The wealth management industry wants you to think the market isn't gambling, despite the obvious similarities. Markets have developed and the long-term benefits of investing surely are implied to outweigh the alternative given the preponderance of historical evidence to be sure. But that doesn't mean investing isn't gambling. At Punk Rock Traders, we are embracing the fact that investment is gambling. We're shedding our Victorian inhibitions and giving the people what they want: high risk, high return options trades.
Markets are very hard. They are hard because it is impossible to predict the future. There is no way to reliably predict markets, even historical data has considerable limitations. Markets can behave in ways contrary to expectations even if you're correct about the outcome of a catalyst. They'll leave the smartest men in the world confounded and humbled. Most people's response to this is to develop a process that is basically agnostic to what will happen in markets. They stick to strategies that are trying to isolate and remove risk. But retail investors are signifying they want more, not less risk, like when they overwhelmingly embraced 0DTE options.
The less accessible wealth preservation strategy (that requires you to already have wealth) makes perfect sense when you're managing money for wealthy people who are trying to keep it. Minimizing risk is the primary imperative. However, there are sure a lot of people who never got wealthy and didn't allow stocks to compound for them over the past few decades. A lot of millennials, for instance, are just starting to get interested in stocks as they mature and enter their primary spending phase. And it is rational, to an extent, to make up for lost time by taking increased risk.
Many of these people may be a lot less risk averse and may be willing to use new financial tools in a way that is basically discouraged and frowned upon by the wealth preservation side of the industry. At Punk Rock Traders, we are geared toward wealth augmentation. We're not shy about what we're trying to do for you. We want to deliver triple digit returns over relatively short time periods that handily beat market performance. The primary way we accomplish this is by taking what many would deem reckless risk in derivatives markets. But we want our trades to simply speak for themselves.
So, we take larger risks for larger gains. And yes, we are okay with that. Admonishment from the Wall Street elite doesn't bother us. Indeed it only makes us feel we are on the right track. Many people simply seem to have left the stock market once sports betting was introduced into their state. We don't want to necessarily say that Punk Rock Traders is for degenerate risk takers, but it kind of is. And you know what, they need a place to get the trades they crave.
The flight from markets to sports betting is sad in the opinion of Punk Rock Traders. In our opinion, betting on the real competition of life instead of the synthetic competition of organized sport is much more gratifying, and indeed can be quite a bit more profitable than sports betting. But we're not confused why so many people wanted to leave Wall Street, they were confused and shunned by a wealth preservation system that is simply not designed to meet their financial goals.
Markets are hovering near all-time highs despite recent bouts of volatility. August 5th was the third largest VIX spike ever, and there have been a few minor spikes since then, but another fact that should speak to the bullishness of our current market was the rapid dis-inversion of the VIX curve following August 5th.
When a major exogenous risk catalyst has remaining uncertainty associated with it, like in the case of COVID or the Global Financial Crisis, then the inversion tends to stick around. Aside from the elevated volatility in October, which is a normal feature of election years, the shape of the curve is pretty encouraging despite the potential for seasonal bumpiness.
This week we provided two trades:
On Tuesday we recommended buying the October 2nd $17 put options on the $VIX. We recommended them at $0.67 and they are currently trading at $1.45, which means they've already experienced a price gain of 116%.
On Thursday we recommended that you buy the January 16th, 2025 $WBA call options at $2.50. The current price is around $6.35. You want to hold them long enough for the extreme malaise of the stock to wear off. This is a bet that one of the market's biggest dogs avoids bankruptcy and enjoys the benefits of a low quality rally in an ongoing bull market. These are up 3% since being recommended yesterday.
As you can see, we choose to use a mix of both longer dated LEAPS and shorter term derivatives. We tend to use LEAPS on single stocks and shorter term contracts on the $VIX. Overall, we are encouraged by the beginning of the Fed cutting cycle, regardless of the size of rates. Other macroeconomic factors give us encouragement as well. Goldman Sachs found the following regarding the purchasing power of the consumer in a report this AM:
“.. Our estimates suggest a .. 5.2% saving rate after also accounting for adjustments that align income and spending with cashflow relevant to households .. only slightly below the average saving rate from 1990-2019 (5.8%) and support our view that downside risk to spending is more limited than commonly feared.”-Goldman Sachs Economics Research
Another factor that strongly encourages our bullish disposition is that despite the market weakness of the past couple weeks, the breadth of the rally has continued to expand significantly. While the market's darlings and highest valued stocks had a rough few weeks, the rest of the market has continued to rally impressively. The broadening out of this rally to more cyclical stocks is decidedly a positive, not a negative.
I would say the market's underlying fundamentals also remain strong. There is very little evidence of an impending recession. Many economic surveys are likely overly negative because they are influenced by an acrimonious election. But the reality is, inflation is no longer a practical issue for markets. The cutting cycle officially begins next week, and I think this should help take some pressure off of Technology.
Technology still has the strongest expected earnings growth. While there may have been a pause in the AI-driven rally, the fundamentals of its leaders remain strong, and the expected drop-off in demand for key AI wares has not yet materialized. It requires increasing mental gymnastics and data cherry picking to support the thesis that we are in a recession. We are in a bull market and I think our two trades of the week have given you great exposure to beat returns in current market conditions. We hold onto some long VIX positions as well, just in case the usual October market route and volatility spike occurs. However, we see the chances of the usual seasonal volatility spike as diminished given the scale of the spike on August 5th.
