“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 believe that the market isn't gambling, despite the obvious similarities. While markets have evolved, and the long-term benefits of investing are implied to outweigh alternatives, this doesn't negate the fact that investing can resemble gambling. At Punk Rock Traders, we embrace the notion that investment is akin to gambling. We're shedding our Victorian inhibitions and offering what people desire: high-risk, high-return options trades.
Markets are challenging because predicting the future is impossible. Even historical data has significant limitations, and markets can behave contrary to expectations, leaving the smartest individuals confounded and humbled. Most people respond by developing strategies that are agnostic to market outcomes, focusing on isolating and removing risk. However, retail investors are signaling their desire for more risk, as seen in their overwhelming embrace of 0DTE options.
The less accessible wealth preservation strategy, which requires existing wealth, is logical when managing money for the wealthy who aim to retain it. Minimizing risk is the primary goal. However, many people, including millennials, are just beginning to engage with stocks as they mature and enter their primary spending phase. It's rational, to some extent, to take increased risks to make up for lost time.
Many of these individuals may be less risk-averse and willing to use new financial tools in ways frowned upon by the wealth preservation side of the industry. At Punk Rock Traders, we focus on wealth augmentation. We're transparent about our goals: delivering triple-digit returns over relatively short periods, outperforming market performance. We achieve this by taking what many would consider reckless risks in derivatives markets, but we let our trades speak for themselves.
We accept larger risks for larger gains and are comfortable with that. Criticism from the Wall Street elite doesn't deter us; it reinforces our belief that we're on the right track. Many have shifted from the stock market to sports betting. While Punk Rock Traders isn't necessarily for degenerate risk-takers, it caters to those seeking high-risk trades.
The shift from markets to sports betting is unfortunate, in our view. Betting on life's real competition, rather than the synthetic competition of organized sports, is more gratifying and potentially more profitable. However, we understand why many left Wall Street—they were confused and shunned by a wealth preservation system not designed to meet their financial goals.
Markets are near all-time highs despite recent volatility. August 5th saw the third-largest VIX spike ever, with minor spikes since, but the rapid dis-inversion of the VIX curve following August 5th indicates market bullishness.
When a major exogenous risk catalyst, like COVID or the Global Financial Crisis, remains uncertain, the inversion tends to persist. Despite elevated volatility in October, a normal feature of election years, the curve's shape is encouraging despite potential seasonal fluctuations.
This week, we provided two trade ideas:
On Tuesday, we suggested buying the October 2nd $17 put options on the $VIX. We proposed them at $0.67, and they are currently trading at $1.45, resulting in a 116% price gain.
On Thursday, we suggested buying the January 16th, 2025 $WBA call options at $2.50. The current price is around $6.35. Hold them long enough for the stock's malaise to dissipate. This is a bet that one of the market's biggest underperformers avoids bankruptcy and benefits from a low-quality rally in an ongoing bull market. These are up 3% since being suggested yesterday.
We use a mix of longer-dated LEAPS and shorter-term derivatives, employing LEAPS on single stocks and shorter-term contracts on the $VIX. We are encouraged by the Fed's cutting cycle, regardless of rate sizes. Other macroeconomic factors also bolster our optimism. Goldman Sachs found the following regarding consumer purchasing power 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 encouraging our bullish stance is the rally's expanding breadth despite recent market weakness. While the market's top stocks faced challenges, the broader market has rallied impressively. The rally's broadening to more cyclical stocks is a positive development.
The market's underlying fundamentals remain strong, with little evidence of an impending recession. Many economic surveys may be overly negative due to an acrimonious election. However, inflation is no longer a practical market issue. The cutting cycle begins next week, potentially easing pressure on Technology.
Technology still boasts the strongest expected earnings growth. While the AI-driven rally may have paused, its leaders' fundamentals remain strong, and the anticipated demand drop for key AI products hasn't materialized. Supporting a recession thesis requires increasing mental gymnastics and data cherry-picking. We are in a bull market, and our two trades of the week offer great exposure to outperform in current market conditions. We maintain some long VIX positions as a precaution against the usual October market volatility spike. However, we see the chances of a typical seasonal volatility spike as diminished given the scale of the August 5th spike.
