Saturday, March 6, 2021

Taking Advantage of The Recent Tech Correction

The recent tech correction has presented a delightful opportunity for some of the late tech entry players like myself as the market moves funds from some of these heavy tech names into value laggard stocks which have been battered heavily by the Covid-19 impact.

While we have yet to see a full-blown impact from the rotation (doubt it will happen), Nasdaq100 has just broken its weekly chart of EMA20 before closing the week right above the support.

Like many others who are delighted of such an opportunity, I have been aggressively positioning to take advantage of such recent correction, albeit through a sell put long-dated option which based on my computation, can return me great returns for this year.

As some of you might know, I have been putting my excess war chest in the recent weeks in GME, and thanks to the high implied volatility caused by the Reddit army, I have managed to secure low-risk high reward returns which I have blogged in the past few articles through a portfolio update. In fact, I considered this to be as safe back then as a fixed deposit element that I have no qualms putting all of my war chests into it while keeping the bulk majority of my position in the Singapore market intact.

With time decay working as a general characteristic of a put option in my favor, my plan was to take profits off the table when an opportunity landed on my plate and channel the funds through by switching positions. If there isn’t any good or decent enough opportunity, I can continue to wait for my options position at GME to expire.

This was what I have for my open position on Thursday (4th March).

With Tiger Brokers (and I believe all other Brokers as well) requiring a full 100% margin requirement for riskier play such as GME, AMC, KOSS, and FIZZ, it means I could suddenly free up my entire capital with a value above $50k should I decide to close out my positions.


What I Have Added Into My US Positions

Clearly, while the tech correction seems oversold in the past recent week, it is by large still relatively small as tech has enjoyed a very solid run towards the second half of 2020 until recently.

As such, I do not think it warrants a direct long position yet into the portfolio as there is a chance things could go further southward from here.

In such a case, I want to exercise higher prudence by not being caught out in this correction.

1.) Advanced Micro Devices (AMD)

The fundamentals of AMD look strong given its recent Q4 earnings and guidance.

Sales revenue top line grew 53% year on year while net profit broke the record with an over 900% increase year on year during this upcycle season. The company is still in the midst of winning more market share through the CPU and GPU market and is expected to be a growth driver in 2021.

From the chart, it broke through the weekly chart for EMA20 last week before resuming this week's downtrend testing the EMA50 support at $75.


Given the recent correction that sends AMD's share price down which resulted in an increase in implied volatility, the premium has been going up and it came to my alert as it descended towards the support line on Friday intraday.

Using this as a golden opportunity, I have opened a couple of contract positions in AMD by selling put on various intervals period from March all the way until Jul 2021, with strike price ranging from $75 to $77.5. 

For instance, I managed to open a position when the market tanks during the intraday for the 16 Jul 2021 expiry at a strike price of $77.5 for a premium of $9.24. Translating this into returns, this position would yield me $9.24 / $77.5 = 11.9% in a span of 4 months, or 35% annualized.

The other way I could look at it is if I am somewhat assigned at $77.5 in July because of a bigger market correction, my actual average price would have actually gone down to $68.2 because of the premium I have already received.

I believe this is a pretty good deal from a risk-reward point of view.

2.) Fastly (FSLY)

Fastly has a pretty predictable pattern in the last few quarters as the company continues to remain volatile over the past few sessions leading up and after the earnings result.

For instance, based on the below appended monthly chart, you can see that share price has gone up to as high as $136 before dropping to as low as $62 during the post earnings of the previous quarter. The market then priced it up again to above $120 before sending the share price down again to as low as below $60 in yesterday's intraday trading session before closing off above the double bottom support.


Sensing this as an opportunity, I have also opened a couple of contract positions for FSLY by selling put on various intervals period from March to September with strike price ranging from $60 to $70.

To illustrate just how good the premium is, Fastly Put options expiring on 17th September 2021 with a strike price of $60 (I consider this to be relatively safe) are trading at $12.40 when I got it. Translating this into returns, this position would yield me $12.40 / $60 = 20.7% in a span of 6 months, or above 40% annualized.

For whatever reason in case I am assigned later in September, my average price for the company would have been at $47.6 considering the premium I have received. I think that's an insanely good deal and value for money.

In addition, unlike GME, Tiger only requires a 55% margin requirement for FSLY (not sure if the same with other brokers) which technically means your leverage returns would have been much higher because of this.

Again, from a risk-reward perspective, I think it deals with a pretty decent deck to option traders.

3.) Palantir Technologies (PLTR)

Palantir is another position I have been following quite religiously with all the contract winnings, the moat strength, the expiry of the lock-in period, and its busty valuations before the crash.

While there is a strong argument to its competitive moats and its dealings with the government agency, the Foundry business is one which they will face strong competition among its other commercial competitors as it appeals to its strong unique data system and analytic software to other commercial deals out there.

While growth remains on schedule in the next few years, I remain fairly cautious on its expansive valuations despite the strong moats it could bring to investors.

Palantir has been battered recently since the lock-up expiry, sending the shares down from their all-time high of $45 to the intraday low session of below $22 on Friday, before closing at $23.95.

Daily EMA200 and Weekly EMA50 support are converging, so I would think that this will be a good position to start going long.

Nevertheless, I have sold quite some contract positions at strike $18 for the 19 Mar expiry. I am also ready to turn direct long should the $18 support holds.


4.) Xpeng (XPEV)

Xpeng is another company I have started to open long-dated sell put option positions since the returns yield is rather enticing.

I have opened some considerable positions for the 15th Oct 2021 at strike $25 for a premium of $5.35.

I have also opened another position for the same period at a higher strike of $30 for a premium of $8.35.

It's not currently a big position and I remain skeptical over the entire saga surrounding the future of an EV vehicle coming into the market and the valuations of how much these companies should trade at.

Regardless, from a chart point of view, I believe the selling has been overdone and I believe the weekly EMA200 support at $26 should hold.


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5 comments:

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  2. Thanks for sharing your thoughts on selling put options.

    These tend to be high when volatility increases. The surprising thing is that put options should be priced lower when the stock spikes up. But from GME, the put options have actually increased in price when the stock goes up, making it the most compelling "sell put" carry .

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    Replies
    1. Hi Verseun

      Exactly! These are really crazy times where regardless where the stock gonna go, the premium keeps going up. I'll let people chase the upside while I'll embark on a safer mode with time decay playing in my favor over time. Unless the company is going crumbling down to bankruptcy, I don't see how this is not a compelling idea at least to park idle cash at the moment.

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    2. If the market goes correction, wouldn't you need to fulfil those put options?

      Delete
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