Issue 91: Senate Vote Screams Buy INTC - Masters in Trading Digest

INTC - Trade of the Week

Last Sunday, we shared 3 new trades with Options members. Today, we highlight INTC.

Why Do We Like the Trade?

  1. It’s a play on semiconductors and the economy recovering
  2. Our options scanner, Wall Street Wiretapper, finds large unusual options activity
  3. Earnings are July 28th, this is a catalyst for movement
  4. Masters in Trading’s proprietary tools show buy signals

Notes from Jonathan:

  • Many trading services share ideas using ‘indicators’ or technical analysis which are purely subjective.
  • All trade ideas shared with Masters in Trading members focus on real (objective) information. We risk money based on real information.

Objective Examples:  Volatility Analysis, Unusual Options Activity, Earnings Valuation

Subjective Examples:  Head and Shoulders, Double Bottoms, Short Term ‘Feel’ Trading

Notice all that Unusual Options Activity in INTC?

We shared 2 trade ideas for members this past Sunday:

  1. Buy September 42.5 Calls for $.90
  2. Buy September 40/47.5 Bullish Call Spread for $1.50

What’s the difference?

The first trade gets us long INTC from $42.5.

If a trader chose to purchase 10 calls, the risk is $900 (you can never lose more).  

If INTC rallies to $50, your position will be worth 50 – 42.5 = 7.5 ($7500 less $900, $6600).  

If the position stays under 42.5 you lose $900.

The second trade has a fixed amount of risk, along with a fixed amount of reward.

The risk for 10 spreads would be 1.50, or $1500

The max reward for this spread is the difference between strikes (50 – 42.5 = 7.5 less the 1.5 paid = 5).

Heard in our Discord

Masters in Trading Digest - Issue 91

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THE TREASURY CURVE IS VERY INVERTED

The 1-month bill is finally trading above the overnight rate. It won’t surprise us to see the market rallying as of this writing (7/18/2022.) In addition, whatever was keeping 1-month and 2-month bills below the overnight rate appears to have gone away.

  • 1-day – Overnight Repo – 1.53%
  • 1-mo – 4 week bill: 1.99%
  • 3-mo – 13-week bill: 2.4%
  • 6-mo – 26 week bill: 2.93%
  • **1yr – 52 week bill: 3.16%**
  • 2yr note: 3.15%
  • 3 yr note: 3.16%
  • 5yr note: 3.06%
  • 7yr note: 3.05%
  • 10 yr note: 2.96%
  • 20 yr bond: 3.36%
  • **30yr bond: 3.11%**

As mentioned during previous Masters in Trading’s Friday Breakdown sessions, this is not normal behavior. There is no financial gain in the trade, yet billions of dollars are booking lesser profits, foregoing the higher returning, fully collateralized, risk-free overnight rate with the Fed as the counterparty.

My conclusion is that this is a collateral issue and the best kind of collateral are short term Treasury Bills. These are the most cash-like instruments out there, thus their high demand. Coupled with low new issuance from the Treasury. 

Now that we see some of this pressure being lifted, as per the now higher rates, I suspect the market will continue rallying. This repricing is reflective of the latest CPI print and the likely case that the Fed hikes by 100bp in the upcoming FOMC meeting.

Assuming we get a 100bp hike, this would immediately put overnight rates above the 1-mo, 3-mo bill rates once again, assuming they don't move at all. Watching how the bill market reacts will be paramount.

The thesis here is that if 1-mo and 3-mo bills rise in tandem with the Fed's next hike and end up above the overnight rate as they are today (just 100 or 75bp higher, or whatever the amount ends up being), we can then derive the collateral problem has been patched for the time being and more upside continues.

However, if bills don't rise in tandem with the Fed or if the rise is lackluster and once again leaves short-term T-Bill rates below the overnight rate, the collateral problem persists and would be considered bearish under this thesis.

Some fun facts per the chart below:

  • The 52-week / 1yr  bill is at 3.16%. The 30yr bond @ 3.11%… The 1yr-30yr curve is inverted by 5 basis points!
  • 6-mo bill @ 2.93%, while the 10yr note @ 2.96%. The 0.5yr-10yr curve is positive only by 3 bp.
  • 6-mo, 1yr, 2yr, 3yr – [the front end] – is collectively higher yielding than the back end, 5yr, 7yr, 10yr, 30yr.
  • The 20yr Bond is somewhat new, and not many issues have been auctioned relative to other tenors – this helps explain some of the premium on it since its inception.
  • Bank stocks tend to do quite well in these environments.
  • GOLD has its large rallies during times when TIPS yields start going down. They've stopped going up, on all 3 tenors – 5, 10 and 30yr – since 6/13/2022. I'm getting back into Gold as soon as I see TIPS yields start to drop.

Pablo Lucena holds a live Friday Breakdown Session at 1 PM EST for Masters in Trading Futures Community members.

FINAL THOUGHTS

WHAT TO EXPECT IN THE NEXT MIT DIGEST

The next issue will be released on Friday. 

Until then, trade smart and always manage your tail risk.

Thanks for reading,
Jonathan Rose

P.S. Have you heard of Unusual Options Activity?

 

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