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Fallback Thursday – Volatility Picks up ahead of Payrolls

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We’re slipping a bit.


With global equities locked in a tight range for the past month, investors are on the lookout for any signs that central banks may start to withdraw emergency support. While Fed officials have mainly stuck to the message that stimulus will remain in place, inflation is perking up, with global food prices surging to the highest in almost a decade. Friday’s payrolls data could add another twist to the debate in the wake of Harker’s remarks, who said Wednesday that the U.S. central bank should begin discussing the time frame for paring back its bond-buying program

Trading volumes have been about half of what is normal in this post-holiday week and it’s very easy to keep things afloat in a low-volume market but, when people begin to start trying to sell and there aren’t enough sellers around – look out below!  We’ve seen this happen.  Remember in 2008 when so many people were trying to sell that the brokerage computers crashed and we had to call our brokers on the phone to try to sell stocks and were told “we’ll do our best”?  You KNOW that can happen – that’s why it’s so important to hedge.

Insanity is certainly back in the market with AMC popping all the way to $70 during yesterday’s session.  That’s a $30Bn market cap for a company that made just over $100M in their best year and lost $149M in 2019 (not even a pandemic to excuse it) and lost $4.6Bn last year and project to lose $1.5Bn this year and another $377Bn in 2022.  So, at 10 TIMES their best year’s earnings, it will take them 6 years (2028) just to make back the money they lost recently.   Still, it’s an amazing stock – it’s amazing they aren’t bankrupt!  

Having learned their lesson the last time the stock insanely rallied to $20 in Feb (yes, that was considered ridiculous then), the company filed to sell 11.5M shares this morning, which will generate $690M at $60, which is more than they make in 6 years.  It’s not profit but, if people are paying you $60 for your penny stock – take it!   Just remember, the idiots that are buying AMC for $60 are the same idiots who are pumping up the rest of the market and causing you to overpay for most stocks – don’t be a sheep!

Year End 31st Dec 2015 2016 2017 2018 2019 2020 TTM 2021E 2022E CAGR / Avg
Total Revenue

2,947 3,236 5,079 5,461 5,471 1,242 449 2,411 4,794 -15.9%
Operating Profit

228 213 102 265 136 -3,986 -2,408      
Net Profit

104 112 -487 110 -149 -4,589 -2,980 -1,465 -377  
EPS Reported

1.06 1.13 -4.75 0.846 -1.44 -39.2 -21.4      
EPS Normalised

1.15 1.53 -4.21 1.15 -0.811 -25.7 -18.7 -3.24 -0.834  
EPS Growth

+84.4 +33.0                

Earlier this week AMC raised $230 million from Mudrick Capital in an offering the company said “will allow us to be aggressive in going after the most valuable theatre assets, as well as to make other strategic investments in our business and to pursue deleveraging opportunities,” which is a fancy way to say they are restructuring to avoid bankruptcy (hopefully).  As noted in this morning’s filing:  

“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” the filing said. “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” The emphasis on this passage is the company’s. 

The filing goes on to discuss short squeezes, social media, retail trading platforms and a host of other factors that AMC believes might be driving volatility in its share price. And for all of this, AMC reiterates time and again, the company is not responsible and offers no assurances to existing or prospective shareholders that any of this makes sense or will last. 

Bed Bath and Beyond (BBBY) was also favored by the manipulators again yesterday with a 62% gain for no particular reason.  BBBY was a Top Trade Alert (sign up here) back last April 20th but it was $4.55 at the time.  Our trade idea for our Long-Term Portfolio was:  

Very tempting down here!  I think, for the LTP, we may as well pick up the 50 of the BBBY 2022 $3 ($3.55)/10 ($1.45) bull call spreads at $2.05 ($10,250) and sell 20 of the 2022 $5 puts for $2.62 ($5,240) for a net $5,010 entry on the $35,000 spread so $29,990 (598%) upside potential if BBBY can get back to $10 in 20 months.  

Clearly it’s on track to collect the entire $35,000 but we cashed it out early as it made about 90% of it’s potential prematurely – there was no sense in waiting for the last 10%.  As I was saying in yesterday’s Webinar, there’s no sense chasing these momentum stocks when you can make 598% on a value stock, is there?   

Another of our Trade Ideas that got some loving yesterday was Pet Med Express (PETS) because I know my Mom spends a fortune keeping dogs alive and, if you want to be able to afford to pamper your pooches, you should make investments like this a part of your portfolio.  I’ll reprint the Trade Idea from our October 27th, PSW Report (sign up here) so you can ponder our strategy in retrospect:  

One stock that reported yesterday that caught my eye was Pet Med Express (PETS) the on-line pharmacy for dogs and cats.  With people sitting home all day with their animal friends, they tend to pay more attention to them when they are sick and spend more money on them and earnings were a huge beat but, because the market sucked – they got sold off anyway.  

While not terribly sexy at 19x earnings, PETS is significantly cheap compared to the 30x average in the On-Line Retail space and has been growing a lovely 8% a year for the last 5 years and that’s doubled in the past year AND they pay a nice $1.12 (3.83%) dividend.  That makes them a great candidate for our Dividend Portfolio and here’s what we’ll do:

  • Buy 1,000 shares of PETS at $29.23 ($29,230)
  • Sell 10 2023 PETS $22.50 puts for $6.60 ($6,600) 
  • Sell 10 2023 PETS $30 calls for $9 ($9,000) 

By selling the puts, we’re promising to double down at net $15.90 and that’s a price we’d LOVE to own PETS at so it’s a very good use of $1,516 in ordinary margin.  We’re only laying out $13,630, which is $13.63/share and, if we are assigned 1,000 more at $22.50 ($22,500), then we’d be in 2,000 shares for $36,130 or $18.065/share, which is 38% below the current price.  That’s our WORST case!

On the upside, if PETS can struggle back over $30 in the next two years, we’ll get $30,000 back for a net profit of $16,370 (120%) PLUS we get $2,240 in dividends for another 16.4% of our cash outlay while we wait.   Aren’t options fun?

In our Earnings Portfolio, we can take advantage of the high VIX and the volatile stock to do the following:

  • Sell 10 PETS 2023 $25 puts for $9 ($9,000) 
  • Buy 20 PETS 2023 $25 calls at $10.62 ($21,240)
  • Sell 20 PETS 2023 $35 calls for $7.50 ($15,000) 

We get PAID to take this spread as our net is a credit of $2,760 which means, even if we are assigned at $25, our net cost would be just $22.40 per share, which is a better entry than our dividend portfolio in their first round.  That’s our WORST case – owning 1,000 shares of PETS at $22.40 ($22,400), which is 23.3% below the current price.  If all goes well, however, we’ll make $20,000 on the spread plus the $2,760 in our pocket so $22,760 (824%) upside potential on this one.  

Most people consider optons a less conservative way to play but our upside at $30 is $12,760, not much less than our Dividend play – yet we’re using no cash (a credit, in fact) and about the same margin yet our assignment risk is 50% lower.  So this is 1/2 of that position (potentially) making $12,760 at the same strike ($30) the dividend play makes $18,620 so about 66% of the profit at the same $30 but with the upside potential of $22,760, which is over 20% more and still 1/2 the risk and 1/2 the allocation – that leves us open to more diversification.


Provided courtesy of Phil’s Stock World.

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