Tag: noah kiedrowski

Navigating Volatility: Options-Based Portfolio

Posted on by Noah Kiedrowski

Introduction

Controlling portfolio volatility is essential as the broader markets continue to break record high after record high along with violent pullbacks. The past three-month stretch of September-November was a prime example as the markets pushed to new all-time highs early in September then suffered a significant sell-off in the same month where the Dow Jones was down as much as 6%. October saw a bounce back into positive territory with new all-time highs set. Then November saw a dichotomy between the Nasdaq continuing to break out to new highs while the Dow Jones experienced significant weakness.

Amid this mixed market and broader index bifurcation, entire sectors were decimated. The payment space was heavily impacted with PayPal (PYPL) and Visa (V) taking huge market capitalization reductions by 37% and 21%, respectively. Quarterly reports have been detrimental for companies that report slight misses or in-line numbers with poor guidance. Disney (DIS) and International Business Machines Corporation (IBM) saw their stocks plummet 24% and 20%, respectively from their 52-week highs. An options-based portfolio can offer mitigation against these pockets of extreme volatility while generating consistent and smoother returns.

Options-Based Risk Mitigation

Risk mitigation can be achieved via a blended options-based approach where the portfolio is broken out into three components. Cash, long equity exposure, and an options component are the three pillars of an options-based portfolio strategy. Options alone cannot be the sole driver of portfolio appreciation. However, options can play a critical component in the overall portfolio construction to control volatility and mitigate risk. Continue reading "Navigating Volatility: Options-Based Portfolio" →

Inflation Hits 30-Year High - "Transitory"?

Posted on by Noah Kiedrowski

Inflation Hits 30-Year High

The U.S. consumer price index (CPI) jumped 6.2% in October, leading to the biggest inflation surge in more than 30 years. The core CPI (removing the impact of food and energy) mirrored these numbers, increasing 4.6% to another 30-year high. Either way, you slice these CPI numbers, these increases are screaming decades' high inflation. The sky-rocketing inflation numbers are negating wage increases that workers have been receiving. These data continue to be at odds with policymakers maintaining that the current price pressures are transitory and related to Covid pandemic-specific issues. Albeit they have admitted that inflation has been more persistent than they expected, they see conditions returning to normal over the next year or so.

Escalating inflation could cause the Fed to tighten policy more quickly than it has signaled. The central bank has indicated that it will within the next few weeks start reducing the amount of bonds it buys each month, though officials have indicated that interest rate hikes are still off in the future. These rising inflation expectations and the realization of these inflationary pressures could cause the Federal Reserve to change policy course sooner rather than later. It's going to be a tug-a-war between inflation, employment, Washington wrangling, and the delta variant backdrop. CPI reports will become more significant as these readings are used to identify periods of inflation. The recent CPI readings are resulting in a much stronger influence on the Federal Reserve's monetary policies hence the recent taper guidance.

Unsustainable Inflation

The CPI basket of goods is increasing at unsustainable rates. Fuel oil prices soared 12.3% in October, culminating in a 59% increase over the past year. Energy prices overall rose 4.8% in October and are up 30% for over the past 12-month period. Used vehicle prices continued rising 2.5% on the month and 26% for the year. New vehicle prices were also up 1.4% and 9.8%, respectively. Food prices also showed an uptick of 0.9% and 5.3% respectively. Within the food category, meat, poultry, fish, and eggs collectively rose 1.7% for the month and 11.9% year-over-year. The Federal Reserve will need to heed these real inflation numbers before it wreaks havoc on the consumer and businesses alike. Continue reading "Inflation Hits 30-Year High - "Transitory"?" →

Screening Key Technicals To Select Option Trade Types

Posted on by Noah Kiedrowski

Controlling portfolio beta, which measures overall systemic risk of a portfolio compared to the market, on the whole, is essential as these markets continue to break record high after record high with violent pullbacks. The month of September was a prime example as the markets pushed to new all-time highs early in the month then suffered a deep sell-off to only bounce back to new record highs in October. Controlling beta while generating in-line or superior returns relative to the market is the goal with an options-based portfolio. A beta-controlled portfolio can be achieved via a blended options-based approach where ~50% cash is held in conjunction with long index-based equities and an options component. Options alone cannot be the sole driver of portfolio appreciation; however, options can play a critical component in the overall portfolio construction to control beta.

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital is the core of an options-based/beta-controlled portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options enable the possibility to generate consistent monthly income in a high probability manner in various market scenarios. An options-based portfolio provides durability and resiliency to drive portfolio results with substantially less risk via a beta-controlled manner. Using basic technical indicators and key dates can aid in trade type selection such as covered calls, put spreads, call spreads, or iron condors (Figures 1 and 2). Continue reading "Screening Key Technicals To Select Option Trade Types" →

PayPal - Importance Of Risk-Defined Option Trading

Posted on by Noah Kiedrowski

Options trading can provide a meaningful addition to one's portfolio when used in a disciplined manner. When used as a component of an overall portfolio approach, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital can be achieved. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. An options-based portfolio can provide durability and resiliency to drive portfolio results with substantially less risk via a holistic beta-controlled manner. When engaging in options trading, specific rules must be followed, and one of the most important rules is to structure every option trade in a risk-defined (put spreads, call spreads, iron condors, etc.) manner.

PayPal (PYPL) was a recent example where the stock witnessed a massive meltdown from an ill-advised acquisition target (Pinterest) coupled with quarterly earnings that were deemed dismal. These two events culminated into a 35% slide from a 52-week high of $310 down to ~$200 post-earnings. Hence the importance of risk-defining all options trades to limit any downward stock movement beyond your protection strike. Risk-defined options trading prevents any losses beyond a specific strike price, avoids the assignment of shares, does not require a significant amount of capital, and does not potentially result in unrealized losses while soaking up capital with any share assignments.

Risk-Defined Options Trading

Risk-defined option trades are straightforward. Below is a theoretical example deploying a put spread on a stock that currently trades at $100 per share. Continue reading "PayPal - Importance Of Risk-Defined Option Trading" →

Facebook - Another PR Disaster

Posted on by Noah Kiedrowski

Another Public Relations Disaster

The recent internal allegation against Facebook (FB) is not the company’s first public relations debacle, nor will it be the last. Facebook has a long history of public relations fiascos with Cambridge Analytica, widespread advertising boycott, various data breaches, and the most recent issues exposing internal memos that allege the company put profits before safety on its platforms. The stock has been battered and bruised, falling from $384 to $325 after these bombshell allegations and testimony on capital hill. The stock is now down 15% from its 52-week high heading into earnings. This double-digit decline places Facebook in inexpensive valuation territory relative to its technology peers, one of the cheapest high-growth stocks. Let’s not be remiss here and acknowledge the fact that these public relations issues can linger for long periods, and the regulatory implications may be significant. However, Facebook’s valuation is very appealing at this juncture.

Social Media Goliath

Facebook continues to demonstrate its ever-expanding and massive moat in the social media space. Facebook’s core social media platform, in combination with its other properties such as Instagram and WhatsApp, continues to grow while expanding margins and unlocking revenue verticals. Despite being faced with several public relations challenges over the past couple of years (i.e., Cambridge Analytica, coordinated boycotts, government inquiries into privacy, jumbled earnings calls, anti-competitive testimonies, and the recent internal release of sensitive information suggesting profits supersede safety), Facebook has triumphed to all-times after each event. Facebook had to contend with scaled back advertising spending amid the COVID-19 pandemic in conjunction with the public relations issues. Facebook continues to grow across all business segments, with its user base continuing to expand slowly. Facebook’s moat is undeniable, and any meaningful sell-off like the recent public relations-induced weakness could provide an entry point for the long-term investor. The stock is off 15% from its all-time highs, and the stock is inexpensive relative to its technology cohort. Continue reading "Facebook - Another PR Disaster" →