August 30th Daily Market Note: End-of-Month Bullish Push takes Indices near breakeven for the month, ahead of Difficult September Seasonality

Hi Folks, here is my 8/30 Daily Market Note, cheers!

Daily Market Note: August 30th 2023 by Larry Cheung, CFA

End-of-Month Bullish Push takes Indices near breakeven for the month, ahead of September

Forward-looking Conclusions of this note:

• Macro: Continuation of releases related to softer data points (GDP/ADP Jobs Report/etc) reinforces downward pressure on the 10Y Yield, recalibrating equity valuations higher.
• Stock-Specific: The Sell Put Positions discussed from Monday have been fruitful due to the rebound in select stocks as well as a falling VIX Level. Ahead of difficult seasonality ahead in September, I am proactively managing these positions.
• Bonds: Our TLT 85 Strike Position for January 2024 has netted us a 35-40% profit, and I will be looking to close this position shortly. Best part is? TLT has done nothing during this period of time.
• China: We’re seeing a nice continuation move in Pinduoduo, and it appears that Baidu is up next as they’ve been approved to release AI tools. No position in BIDU for me at the moment.

Daily Market Note & Context

Given that the markets are in continuation stage from yesterday, I want to take this Daily Market Note to briefly discuss my methodology and have a brief discussion on Options to provide investor education.

The last 10 calendar days have been very fruitful for members who positioned for market stabilization/advances, whether it was through Direct Shares, Sell Puts, or Buying Calls on the names that I’ve listed repeatedly in my Letters since my Daily Market Notes began in early August (archive here). Now for me personally, I tend to employ Selling Puts as a core strategy first and Direct Shares second. Buying Calls is something I do only when I’m exceptionally bullish on the stock AND the market as a whole. This is because I have run the statistics and probability scenario analysis on different market conditions, and my conclusion is the following:

• Selling Puts provides some degree of leniency on timing of entry.
• Direct Shares require timing to be relatively precise
• Buying Calls require timing to be extremely precise, especially if the Calls have expirations less than 30 days out. My personal experience suggests that even LEAP Calls (next year Call Options) do require quite precise timing of entry.

As a result of greater emphasis on timing, the reward and upside from Direct Shares and Buying Calls is far greater than that of Selling Puts. The catch is that timing must be very good, and that the market is in a clear state of trend without only minor pullbacks along the way. This is because the effects of a pullback on Call Options that are at-the-money are very pronounced and can cause quick & immediate losses, accentuating the importance of timing when it comes to Long Calls. On average, my observation is that a mere 5-7% pullback in a stock from an at-the-money Call can result in a 25-35% cratering of the option value.

For this reason, my priority is to build a Community that has a repeatable, systematic, and sustainable strategy that works over the long term. Week in, week out. Month in, month out. Like a business. I focus on opportunities that I believe have positive expectancy. I believe that my Community’s focus on Selling Puts (and Strangles when context is right) is repeatable, systematic, and sustainable for the exact reason that there is a degree of leniency on timing of entry. When opportunity is truly compelling, then yes, I will of course do Direct Shares and Long Calls (and even Long Puts) - but ONLY when the opportunity is there. As previously discussed, I am usually a Net Seller of options (read my methodology here). 

The first half of August was rather challenging for most Investors, and the second half of the month has largely been a path back to breakeven for the U.S. indices. September tends to be a rather challenging month for stocks from a seasonal standpoint.

In a note to members in our Private Group Chat this morning, I’ve closed out half of my Sell Put options positions discussed from this past Monday (I’ve unpaywalled this note to the public, now that members have already benefitted from it). Later this afternoon, I’m going to close the remaining half. VIX has plummeted to 14, ahead of a seasonally difficult time for the market. After today, I’m going to be very heavy in cash and just sit tight for further opportunities. I can wait as long as needed - Members know that. Between all the action that we’ve done over the past several weeks, it’s been a very good run and now I must wait for setups to return to me. If the market keeps running without me, that’s fine. Cash will pay me .33% per month to wait. When the pullback comes, I will be in a position of strength.

And I will help the folks build on their gains from thereon-out. 

Have a wonderful day.

-Larry

P.S. - Members, please be in Private Group Chat to receive Pre-Market Updates Monday-Thursday - Link here. If you use Android, you need to follow these steps on a laptop/desktop. iPhone users can do it straight from the phone. 

Please also remember that I do not really check Patreon DMs. Please message me on Instagram if you have an urgent question.