Here Comes Earnings

They Ain't Going To Be Good

Just another week, eh? I think I’ve figured it out. A while back I posted an article on how unemployment numbers are calculated and reported. (See “Labor Daze”). Earlier this week, on Thursday, ADP came out with numbers approaching 500,000. On Friday Non-Farm payrolls numbers were reported; a little over 200,000. Now I ask you, where did 300,000 people go? I don’t have faith in what’s reported by our government. Is all of it accurate or just a “Bidenomics” smoke screen? But “really” the difference is a big discrepancy. I think I’ve figured it out.

The Federal government, while allowing immigrants to flood across the Rio Grande isn’t counting them in the Non-Farm numbers but ADP is. Makes sense; in order to get a paycheck immigrants have to “sign on the dotted” line to get a check. As such their employers, many of which use ADP have to create a “record of employment”. I guess the economy is doing better, based upon ADP’s report, than what “Uncle Sam” wants you to believe. It showed in Friday’s market results as no one reacted to what was reported; even the Dollar tanked. So ask yourself, whose report do you believe?

Here Comes Earnings

Well it’s Sunday night so welcome to “The Week That Was & What’s Next”. Last week a little time was spent talking about hedging. did you get your ‘hedge”on? It’s time for earnings and guidance to start hitting the wires. Here’s a little bit of what I’m reading and listening to:

• 2nd quarter earnings season kicks off on Friday, July 14.

• Analysts are expecting a -6.8% yearly profit decline.

• Analysts expect a decrease of -0.4% in revenue growth despite inflation.

Are you ready for some volatility? Notables JPMorgan Chase, Citigroup, Wells Fargo and UnitedHealth report their latest financial results next week. Tesla, Netflix, IBM, BofA, Goldman Sachs, Morgan Stanley, Charles Schwab, AMEX. United Airlines and Johnson & Johnson report earnings the week after.

During July’s final week Microsoft, Alphabet, Meta and Amazon report with Apple’s results hitting on Thursday, August 3rd. Investors are bracing for the worst reporting season in three years as the negative impact of macroeconomic headwinds “hit the fan”.

Earnings per share for the S&P 500 fell -2.0% in Q1 2023 and they’re expected to drop -6.8% in the 2nd quarter compared to the same period last year. If confirmed it marks the third consecutive quarter in which S&P 500 earnings have declined year-over-year. Sales growth is expected to decrease -0.4% versus the 2nd quarter of 2022 as well. This is not good folks. If prices of stocks don’t decrease the S&P 500 P/E ratio will soar and that’s highly unlikely. Again, did you hedge last week? There’s still time.

Basic Option Spreading Techniques

Last week time was spent illustrating a couple “hedging” strategies. Continuing along that line, let’s take a look at a couple introductory “spreading” techniques employing “stock equity” options. Option strategies can be applied to any underlying investment with listed options like ETFs, Cryptos, Currencies and Futures. I’ve discovered it best to begin with something you are familiar with. I’m currently working on putting a few courses relating to options together. Let me know if there’s anything else to include.

Option spreading techniques involve combining multiple options positions to create a specific risk / reward profile or to take advantage of different market scenarios. Here are some basic vertical option spreading techniques:

• Bullish Vertical Spread: Buy a lower strike call option and simultaneously sell a higher strike call option with the same expiration. This strategy profits from a moderate upward move in the underlying asset's price.

  A Bull Call debit spread is a long call options spread strategy where you expect the underlying security to increase in value. Within the same expiration, buy a call and sell a higher strike call. Risk is limited to the debit or premium paid ‘Max Loss’, which is the difference between what you paid for the long call and short call. Profit is limited to the difference in strike values minus the debit the ‘Max Profit’. The bull call strategy succeeds if the underlying security price is above the higher or sold strike at expiration.

  In “days gone by”, way back in the 1970s and 1980s, the computers used together with Hewlett Packard financial calculators like the HP-10C had less memory and power than an Apple iWatch. We used to design programs that Barchart has made available with a couple clicks in today’s world. What follows is a screening option from Barchart breaking down the best “bull call” debit spreads simply ranked by their “Max Profit %”. All the information you need is right there at your fingertip; just pick one; easy, eh? That’s why I use Barchart.

  

  Barchart Bull Call Debit Spreads Screener

• Bearish Vertical Spread: Buy a higher strike put option and simultaneously sell a lower strike put option with the same expiration. This strategy profits from a moderate downward move in the underlying asset's price.

  A Bear Put debit spread is a long put options spread strategy where you expect the underlying security to decrease in value. Within the same expiration, buy a put and sell a lower strike put. Risk is limited to the debit or premium paid ‘Max Loss’, which is the difference between what you paid for the long put and short put. Profit is limited to the difference in strike values minus the debit ‘Max Profit’. The bear put strategy succeeds if the underlying security price is below the lower or sold strike at expiration.

  What follows is a screening option from Barchart breaking down the best “bear put” debit spreads simply ranked by their “Max Profit %”. It’s amazing what you can do today; take advantage of it and give Barchart a try.

  

  Barchart Bear Put Debit Spreads Screener

Example: Using Apple December 2023 Options

If you asked a room of traders whether AAPL is going higher or lower, chances are you’d get answers covering both sides. With that in mind let’s use AAPL December 2023 call and put options to finish this discussion up with an example.

For an AAPL Bull Call Spread we’d buy the AAPL $190s at $14.09 and sell the $210s at $4.52, a debit of $9.57. That means for you to break even, AAPL would need to close at $199.57 or higher. The theoretical “Max Profit” is $10.43 if AAPL closes at or above $210.00.

For an AAPL Bear Put Spread we’d buy the AAPL $190s at $9.12 and sell the $170s at $3.60, a debit of $5.52. That means for you to break even, AAPL would need to close at $184.48 or lower. The theoretical “Max Profit” is $14.48 if AAPL closes at or below $170.00.

These are just a few basic option spreading techniques. It's important to note that each strategy has its own risk/reward profile. Understanding the dynamics of options and the underlying asset is crucial before implementing any strategy.

The “tools you use” make all the difference in the world. I use Barchart and have for years. I chose to partner with Barchart because of the plethora of information they’ve made available, how it’s displayed and more so the availability of ‘webinars’ to teach you how to use everything. Even I find something new every day.

Give Barchart a try, just “click here”; get a trial for free at no risk. It just might be the best ‘click’ you’ve ever made.

Spreading is one of the courses I’m drafting at The Ticker EDU and it’s complimented by courses in Futures, Options, ETFs and thanks to you many more, 26 to be exact so far . I’m pretty much working almost around the clock to take what’s “in my head” and put it “between your ears”. A few of the courses should be on the table by the end of July, maybe sooner if I can learn how these “newfangled editors” work or if someone puts 27 hours into each day versus the current 24 hours we’re accustomed to.

I’m just a “young” 68 years old looking to help you become the best damn investor or trader you can possibly be. Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.

Finally a little “rap” fits the daily musical selection. XXXTENTACION probably never entered an order to buy or sell any security but “Going Down” fulfills the direction the market is heading. Down is good. It creates value for those who are patient. Recession has been delayed by the government “pumping” money into the system. Student loans being paid takes some of that “money“ out of the system along with higher rates and a declining dollar. It’s about time.