Author Topic: Investing in Next Week's News  (Read 28253 times)

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #350 on: August 24, 2020, 12:01:43 PM »
I have dozens of individual stock picks invested on the theory that "stocks recover".  So I bought individual stocks in different areas of the market, and plan to await those companies either going bankrupt or recovering (from Covid-19).

Over the weekend, I tried grouping related stocks together.  I might find several stocks that are all rather related, and probably don't move independently of each other.  (Maybe I should calculate the correlations of some of these stocks, to see)  That means if I get rid of one of the related stocks, I'm probably just as diversified as before.

Some of the groups of stocks have one stock that is further along in it's recovery.  It has a profit already, and has a smaller expected profit in the future.  So I've sold a couple stocks like that today, helping reallocate investment dollars to where they can make higher potential gains.

As a nice co-incidence, many of my stocks are up today, making it a good day to sell.  I suspect the bump is from blood plasma treatments getting an emergency use directive, which allows widespread use of the treatment (where appropriate).  But most news of this type tends to be fleeting, so it seems like a good day to sell.

Although I'm mostly waiting for vaccine news, I suspect there will be up and down days before then.  Stock options move even more dramatically than the underlying stocks, so options are rather expensive today.  I plan to await a down day when they will plunge even further than their underlying stocks.

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #351 on: August 29, 2020, 01:15:30 PM »
I might find several stocks that are all rather related, and probably don't move independently of each other.  (Maybe I should calculate the correlations of some of these stocks, to see) ...
I looked at stock correlations, and learned a few things about the stocks I hold.  I was also surprised to learn that during the pandemic, U.S. and international are 0.95 correlated (Portfolio Visualizer's website, Mar 9 2020 to present, using daily correlations over 20 days).  I expected more diversification between VTI and VXUS.

Back at the start of June, the economy started reopening.  Covid sensitive stocks had a big jump in value which is easily visible when looking at a graph of their stock price.  I used Google Finance to compare each of my stocks to Macy's, which had a clear bump around that time.  Most of my stocks had very similar reactions, which is reassuring.  It's like testing to make sure they are Covid sensitive, and most of my stocks passed.

I expect phase III vaccine news in 2020 Q4, maybe Oct/Nov.  Given the worldwide importance of that information, it might leak early.  That's why my stocks and options are ready to recover if something happens.

Everyone mentions cruise lines as Covid sensitive stocks.  Back in late July, I bought Jan 2022 call options on Carnival Cruise Lines stock (CCL) at a $17.50 strike.  I bought more options at a $15 strike in early August.  So far, that seems like a good plan:

CCL stock, Aug 21-28, +17.5%
CCL call $15, Aug 21-28, +30.2%
CCL call $17.50, Aug 21-28, 31.4%

I'm confused about one aspect that maybe @Financial.Velociraptor can shed light on.
CCL stock went from $14.65 to $17.21.
https://finance.yahoo.com/quote/CCL/

Jan 2022 call options with $15 strike started with no intrinsic value ($14.65 is under the $15 strike), and ended the week with $2.21 of intrinsic value ($17.21 - $15 strike).  Shouldn't call options with 70 weeks remaining have gone up by $2.21, which is the amount the intrinsic value increased?

The CCL call options went up $1.75, from $5.80 to $7.55.  I assume the price is accurate since over 3,000 contracts were traded on Aug 28.
https://finance.yahoo.com/quote/CCL220121C00015000?p=CCL220121C00015000

ChpBstrd

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Re: Investing in Next Week's News
« Reply #352 on: August 29, 2020, 08:27:15 PM »
An optionís delta is the amount of expected change in the optionís value per $1 change in the underlying asset. Delta ATM is generally lower the longer the duration is because there is a lot that could happen between now and a long time from now. OTOH, if the stock goes up $1 today it is likely much of that dollar will still be there tomorrow. When an option has months to go, the daily wiggles are not very predictive of the price at expiration.

The one constant that will hold true is that the option price will be high enough not to permit an arbitrage opportunity. E.g. buying and assigning the option for a profit.

Also note that the marketís estimates about a stockís volatility can change in just a couple of days, obscuring change due to delta.

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #353 on: August 29, 2020, 10:28:27 PM »
I just read about "delta", which is the change in option value per change in stock value.  And it can be thought of as the probability the option is valuable at expiration.  The more profitable the option, and the shorter the time to expiration, the closer delta gets to 1.0.

The stock changed by $2.56 ($14.65 to $17.21) and option by $1.75, or 0.68 as much (the delta).  But that's an entire week, so it probably makes more sense to look at just the last day.  CCL went up $1.09 on Friday (8/28) to end at $17.21.  The $15 calls went up $0.84 that day, showing a delta of 0.77.

Seems like the more in the money the options get, the higher delta rises.  So over time, and with greater increases, the options will track more and more closely with the stock.

Financial.Velociraptor

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Re: Investing in Next Week's News
« Reply #354 on: August 30, 2020, 10:09:06 AM »
Shouldn't call options with 70 weeks remaining have gone up by $2.21, which is the amount the intrinsic value increased?


Short answer - nope.

Long answer - Once in the money the total value is the sum of intrinsic value and time value.  Time value has to decrease to stay in parity with the same strike companion (put/call) to maintain put/call parity.  Else, there is a risk free profit that the big hedge funds will arbitrage away in microseconds with algorithm based trading.  The further you go into/out of the money (e.g. away from at the money) the lower your delta becomes.  It is a little bewildering at first but makes sense once you consider it in context of arbitrage profits.

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #355 on: August 30, 2020, 11:09:23 AM »
Looking at CCL stock and options on 4 days in Aug (21, 24, 26, 28) I still see some behavior that's hard to explain.
CCL stock prices: 14.65 ... +1.49 = 16.14  ... -0.86 = 15.28 ... +1.93 = 17.21

$15 call delta: 1.14/1.49 = 0.765 ... -0.89/-0.86 = 1.03 (!) ... 1.50/1.93 = 0.777
These options trade frequently, which rules out one cause of a 1.03 delta.  Do options simply fall faster than they rise?

$15 put delta: -.045/1.49 = -0.302 ... +0.15/-0.86 = -0.174 (?) ... -0.48/1.93 = -0.249
Another outlier with Aug 24-26 data, where as the stock moved very close to the PUT's strike price, delta dropped dramatically.  It should be the opposite ... ?

One personal observation: long-dated call options fall very quickly on bad days.  Right now I have 10% cash from selling some overlapping stocks.  I plan on waiting for a buying opportunity (if any) before vaccine news in some number of months.

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #356 on: September 03, 2020, 02:35:23 PM »
Today the CDC told states to prepare to distribute vaccine by Nov 1 2020.  That has pushed Covid sensitive stocks higher, like Carnival Cruises (CCL) and Macy's (M).  For example, CCL stock rose to $17.33 (+3.7%) and Jan 2022 call options rose +7% ($15 call) and +11% ($17.50 calls).

I bought options/stocks weeks or even months ago, so now I'm just waiting for the market to decide if I'm right or wrong.  Today is evidence I could be right, with Covid sensitive stocks making decent gains.  Many of the options I've bought are thinly traded, with the last trade often being days or even weeks old.  But now most of those options are being traded more frequently, so I think more people are starting to use the approach I've described in this thread.

Some are still thinly traded.  I bought options weeks ago, and the last trade date still shows the date of my purchase.  For that strike price and expiration date, I'm literally the only buyer in the past few weeks.  Normally that's dangerous, but the middle of the bid-ask spread is up +50% from what I paid.  So thinly traded, but profitable.

Today's vaccine news might trigger a backlash: the timing 2 days before the election does look politically determined.  It heavily favors incumbent President Donald Trump, by announcing a cure right before people decide how the President has handled the Covid crisis.  And I think the media likes that kind of story, so they'll run with it.
https://www.cnbc.com/2020/09/03/hhs-azar-says-nov-1-coronavirus-vaccine-deadline-has-nothing-to-do-with-election.html

I guess I should have made that prediction earlier!  So maybe tomorrow (Friday) or Monday there will be enough speculation that Covid sensitive stocks give up some of today's gains.  There could be uncertainty if the vaccine release date is politically motivated.  If people feel strongly about it being political, they might not take the vaccine, and that prolongs the recovery.  I think that wave of controversy will be brief, and fade quickly.

ChpBstrd

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Re: Investing in Next Week's News
« Reply #357 on: September 04, 2020, 01:38:17 PM »
^ This could be a "buy the rumor, sell the news" moment.


MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #358 on: September 04, 2020, 11:54:06 PM »
Maybe it's my years of passive investing, but I plan to "stay the course".  I know vaccine news is expected, but I don't know the exact date.  Rather than miss a +15% (Sept 3) or +30% (early June) spike in the price of Macy's and similar stocks, I plan to hold on to my options and shares.

Even after those stock price jumps, Macy's is still -54% down YTD.  Since Amazon has probably done real damage to brick and mortar retail, I don't expect 100% recovery where Macy's doubles in price.  But a halfway recovery is still a huge gain, especially for leveraged call options.

MustacheAndaHalf

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Re: Investing in Next Week's News
« Reply #359 on: September 20, 2020, 10:42:49 AM »
Maybe I need a new thread "investing in next quarter's news", since that's the time frame.

My investment approach is awaiting several events:
(1) vaccine trial(s) reach the full 30,000 participants
(2) hundreds of people in test will get sick
(3) the vaccine is declared effective or not (with a percentage)
(4) doctors and nursing home patients, being most at risk, are given the vaccine
(5) I predict doctors will be very successful at convincing their patients to take the same vaccine

I think (2) will confuse people - if it's a vaccine being tested, why did people get sick?  Some were given a placebo, most were given the vaccine.  Very soon after this, researchers will go over the data and figure out if most of the sick people took a placebo.  If it's fairly even, the vaccine is worthless.  If it's almost all placebo takers, the vaccine is very effective.

Then there's the FDA approval, followed by 100M doses of vaccine being available.  Yes, we'll go from zero to 100 million because drug companies are making vaccine candidates "at risk".  If they win the race, they make billions - so they can risk a billion making a vaccine that might prove worthless.

Polls suggest 1 in 3 Americans won't take the vaccine.  But we don't have a vaccine now - the question is how many are willing to take a vaccine when it becomes available.  Consider who gets the vaccine first: doctors and nursing home patients, both of whom are very high risk groups.  So now you go in for a doctor's visit, and your doctor has already taken the vaccine.  How effective will doctors be at convincing their patients to take that same vaccine?
https://news.gallup.com/poll/317018/one-three-americans-not-covid-vaccine.aspx

So I think public opinion will change based on information, and people asking their doctor what to do.  I'm expecting well over 80% take the vaccine, even knowing that about 10% of both political parties are anti-vaxxers.

Of all the events I mentioned, event (3) is the big one: a vaccine is given a level of effectiveness based on who caught Covid-19 and who didn't.  A vaccine can be valuable in controlling outbreaks and reducing deaths... and still not be strong enough for people to feel safe flying on airlines and visiting malls.  Or in an ideal case, it could be very close to 100% effective and paves the way to recovery.