Coffee and Options Newsletter Feb 19 2023

Berkshire Hathaway’s Charlie Munger was asked about long-term valuations: “I don't worry about it too much, because I will be dead." Probably true. For the rest of us with a few more years on the timeline… let’s analyze.

Close to close it doesn’t seem like as much is going on but below the surface market ping pong continues as intraday volatility far outpaces broader implied volatility – days with 120-185 S&P500 moves have been common. We talked about how 6 month to 1 year option pricing was a little cheap and for gamma traders who scalp market moves this has most certainly been the case over the last couple of weeks. For gamma trading clients I have been keeping an eye on the ATR (average true range) in order to pick scalps and this has worked well. Technicals have also worked as the QQQ has bounced twice off the 297.50-299 breakout zone. So we’ll continue to do more of the same as long as this market keeps battling it out: for now it’s FOMO versus the Fed. Fed governors and presidents keep warning of persistent rate hikes and Fed funds futures are now pushing up and out, meaning higher, later, and likely for longer, with the likelihood of that elusive rate cut pushing out to 2024. The bears do have some great arguments – big tech profit recession, poor outlooks, high valuations, severely inverted curve… also one thing to keep an eye on: momentum is wanning with the MACD crossing down. Low cash and FOMO has to defend here a bit.

We’ve seen the pile-on of strong data: following blow-out jobs numbers we saw both strong retail sales and a super strong PPI number – this in theory should be hawkish for the Fed and bearish stocks, but so far the market is seeing it as more of a “soft-landing” data point. The recovery from doom and gloom 2 months ago continues. With Walmart, Home Depot, Target, BestBuy, Macy’s and Gap on tap for earnings reports this week let’s see how the market interprets the retail glass: half-full or half empty. Good news has been good news and we’ll respect that trend for now. No sense in peeing into the wind - markets don’t seem to mind, for now: multiple expansion is back in vogue.

A small crack in the MSFT ChatGPT saga as an article about “weird ChatGPT responses” was published. I had recommended to clients a switch out of GOOG and into MSFT with GOOG at 98 and MSFT at 235 a few weeks ago. This trade was up almost 20% in only a couple of weeks but this past week we saw MSFT give up some of the exuberance as the AI fervor fizzled as bit. I still maintain that it’s early innings and that GOOG could be stuck in a value-trap zone as Microsoft has so many ways to make inroads with this “new” technology – they will most certainly take some search market share from Google but it’s really the integration of the technology into the Office suite that gets me excited. The possibilities are endless and I think that maintains a bid in MSFT. Google is the AI incumbent but they’re under threat and need to respond in a big way. They will, but MSFT’s software revenue moat is something they just don’t have so I continue to favour MSFT despite Google’s cheap valuation.

Enjoy the rest of the long weekend!

Hans Albrecht

Gamma Capital Advisors

At Gamma we can help you build an option overlay vision that works for you or your clients.

Hans Albrecht, CIO and Portfolio Manager, Gamma Capital Advisors

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DISCLAIMER:

None of the content in this newsletter is meant to be construed as investment or life advice. It is strictly for educational and entertainment purposes. Always check with your advisor to make sure that any investment falls within your personal risk tolerance parameters and investment profile.

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