Weekly Plan 2.19.24

The primary expectation was to see the dip buyers emerge near 4930 last week, as well as noted exhaustion around 5030 level in my previous weekly plan, which pretty much remained the resistance all of this past week.

Now this exhaustion needs to be resolved for a move higher, else we can see us sell down into some of the lower support levels mentioned below.

For the week ahead, it is going to be a fairly light event risk week with the exception of the housing data on Thursday and NVDA earnings on Wednesday.

As far NVDA earnings go, from my perspective, the only thing that matters is the expected move which at time of this post is about 11%.

This is crazy for a stock of this size. An 11% move for 1800 billions dollar company? Crazy times.

With this sort of expected volatility, the options are very expensive for purchase, so I am not going to bother during the earnings week.

Now this high IV environment is a perfect world for option sellers. There are more interesting plays out there like Credit Spreads and Iron condors that make more sense. An Iron Condor uses high implied volatility to earn a credit. In an Iron condor, a trader creates a bracket of expected range by placing 4 trades at the same time: Buy & Sell a call AND buy & sell a put for the same expiration. The brackets of the Condor are what a trader typically expects the market to stay within.

So for instance, a trader can sell and buy a 660/670 PUT and at the same time, for same expiry, and sell & buy a 830/820 CALL. This transaction can net a credit which if the underlying expires within this range, the trader gets to keep. Due to such high implied volatility, calling a direction on NVDA is a crapshoot in my view, but I think if there are going to be any dips into 620-625 area, they could get bought for another move higher. NVDA is trading around 725 at the moment.

With regards to NVDA, I already shared my view a couple of weeks ago when it was near 750, but I will rehash it:

1. NVDA has done very well, no doubt about it, and in my Substack, I have been a NVDA bull from the 400s.

2. As covered in my Daily Plan on Thursday, NVDA is now getting into the “Capital allocator game”. The last thing they want to see is to crash and burn like SMCI as it erodes confidence in the company’s leadership.

3. This is why I think Company Honcho Jensen Huang has a delicate task on the 21st to share the earnings report on a company where a lot of good news, atleast for now may have been priced in. At the same time, he has to guide as to neither cause a crash, nor another parabolic move as often parabolic moves lead to crashes later. These C suite guys know better than any one else that the stocks have rallied 700-800% in a year or two, but that alone does not mean that there is absolutely 0 risk for these companies in coming year to two. So, the management has to walk a tight rope knowing the current market conditions.

4. This is why I think this will be a good earnings but the guidance will be a little bit more muted, unlike last few times, and I think if this leads to the stock dipping, these dips could be bought.

In a perfect world, I see NVDA glide down a little bit from here and consolidates a little bit around 600 handle for a push higher. Consolidations are healthy. These consolidations then can be used as potential supports on pullbacks. What happens when a stock does not get enough breathing room to consolidate?

It crashes 20% in a day.

Look, when you ask a value trader, like myself, if 750-800 NVDA is a good price, you will never get a satisfactory answer because one does not exist.

When a trader does nothing when NVDA was a 100, does nothing at 200, does nothing at 400, but decides to become bullish at 800, I will fade that trader. I am not saying stocks can not go up from 100 to 800. I am not even say NVDA can not go higher from 800. They can and they do. However, the speed of move in this instance is quite unprecedented, given everything else. With such speed, for a value trader, it presents a dilemma - where to place a stop? What is your Line in Sand going to be when a stock has gone up 100% in a month?

Moving on…

PUT spread is another example of expressing bullish sentiment on something but with a limited downside

Let us take an example of ROKU

I shared ROKU earlier in the Stack at 40, before it rallied to 100 or so.

Now it has collapsed again, it is now trading 72 and is experiencing tremendous volatility.

Under such conditions, yes, one can look at directional calls and puts, but the IV is simply insane! Which means the premiums you are paying are simply insane!

In such insane conditions, to me, if I am bullish, a PUT spread makes most sense.

To give you an example, as ROKU drops near 65-68, I get more bullish for another test of 80 atleast on ROKU. But I am also concerned about being taken advantage of by the MM. What if I pay $3 for $80 call in March OPEX, and the stock expires FLAT on March 15, only to rally 10% the week after my calls have expired worthless?

When the Implied Volatility is very high, the MM are not going to pay every one who has purchased a PUT or a CALL. In fact they will try not to pay any one. This is what creates range bound action on high IV stocks. This is what makes them close flat on expiry dates. A smart trader wants to buy an option when the IV is low. Once IV takes off, a smart trader is looking to sell, not buy.

To counter such shenanigans by the MM, I only like directional calls and puts when no one is expecting any volatility. Like SMCI at 65 or 240. Not at 1100! When the volatility gets too high, I am searching for credit spreads.

In case of ROKU, the 3/15 MOPEX PUT SPREAD FOR 65/70 is around $1.8 and max risk is about $3.25. As it drops closers to 70, this becomes even more attractive. Then, if the stock expires flat between 65 and 70, my credit spread does not expire worthless, but I would want to take atleast half off, if I am up about 50% on the value of the spread, i.e. about 90 cents to a dollar- again, to not fall prey to the shenanigans of these option sellers.

A lot of option selling is based on advanced math concepts. In other words, for a layman, once an option price has moved up 100-200%, the underlying greeks and intrinsics have significantly shifted.

Makes sense? If so, then subscribe and join smart people like your self for more such educational insights. If not, then go back and read again.

The Last Hurrah for Housing Market?

Mortgage rates are rearing their very ugly and large head above 7% again. Most prospective home buyers were counting on lower rates now, in fact the expectation was to see about 7 cuts this year, starting as early as March.

With recent inflation data, this has been pushed down to just a handful of rate cuts, and that too to begin in June now. Not even May.

My own take on this is that this is the last tick higher by the mortgage rates and they should soon come down for rest of the year.

I personally think if you are a seller, then this is the best time to sell rather than wait for lower rates.

Yes, lower rates will come. However, it will also come with a surge in number of sellers. I expect Climactic action in the housing market where volume explodes in next 3 months but the prices go nowhere.

Now this is not my take on each and every housing market out there. This is primarily for areas like Bay Area for instance. Bay Area has a few factors going against its housing market. First off, there is on and off discussion of new taxes going up on certain demographics. These sort of conversations always begin benignly.

When the US Federal income tax was instituted back in the early 20th Century, the politicians sold it to the General Public as a 1% tax on only the TOP 1% of the earners.

Now this tax is ubiquitous with atleast half the Americans paying it.

Same way, this wealth tax in these states, like NY, is being marketed as only applicable to the ultra high net worth individuals. But eventually I believe this tax will apply to any one and everyone in the state. Then you also see the weaponization of the legal system in these states againt some individuals which those in power do not agree with. We just saw this with the ruling in Delaware against Musk’s compensation package. Over time, this will erode new business formation in such states. When businesses move, they take jobs away with them.

Due to this, and some similar other reasons, I think the Southern states, especially cities like in Texas will continue to grow for another couple of years. May be forever as this mass migration continues to expand. You do not have to take my word for it- contrast the homes for sale in these cities and those for sale in Austin, Miami etc.

You can compare the prices in 2021 versus now. In former, the price delta between 2021 and 2024 either does not exist, or is very small. Now do the same analysis for a house in Miami. The prices are 100% or even higher now than they were in 2021. Whether that’s sustainable is another conversation.

Now, while I think this is a good time to sell if I am a seller, if I am a home buyer, I think it is better to wait once the school season in March passes. I think there will be much better options in July-August time frame. Even if the pricing does not come significantly lower, I think the number of properties for sale will be much higher, offering a wider range of choices. This often means lower prices as well.

Outside of these few setups, due to the holiday shortened week, I am not seeing a lot of great set ups.

But trust me, when I see one, this substack will be the first one to know all about it. Remember, my ideas from this one month alone - the likes of XPO, GCT, SPOT etc. Perhaps dozens more. As far as I know, no other publications is sharing such ideas for the price. May be proprietary research comes close but that often costs a couple of grand a month or more. Do you really wanna pay 2000 bucks for research or just subscribe to this publication for next 10 years for that price?

Let us talk about my views on this new AI stock, plus levels for SMCI, as well as S&P500 EMini levels for this week ahead.

Let us first address the levels for the week.

The market (Emini ES) is at 5025 at time of this post. Having sold off about 50 dollars from that 5060 level I shared as resistance last week and having bounced about 100 dollars from my weekly support levels.