May 26th 2023

AI Frenzy Steals the Spotlight From Debt Ceiling Debate

It wasn’t that long ago that I said to forget about the debt ceiling debate because the Nasdaq is the true star in the room. That was on display yesterday as the Artificial Intelligence frenzy pushed the market higher.

Ever since ChatGPT was released to the public last November, people have either been predicting the end of times, or comparing this with the dotcom bubble of the early 2000s.

I actually think we’re somewhere in between.

The dot-com bubble was partially triggered by the rapid emergence of over 4,000 companies within a short timeframe, each going public through an initial public offering (IPO), only to demonstrate minimal profits once the blackout investor period concluded.

Consequently, this sparked a widespread frenzy of selling. Amidst this tumultuous period, only the companies with strong fundamental structures, such as Amazon, Google, Yahoo, and eBay (to mention a few), managed to weather the storm and survive.

The landscape around the topic of AI is certainly similar, but different. The rush to invest in a somewhat unproven landscape is driving prices to unsustainable levels. That said, Microsoft, Google, and Nvidia are well-established companies and this is an add-on service to their business. I would be talking more about an AI bubble if we had 4000 AI-specific companies all going through an IPO.

We could certainly see a peak in the AI craze and we could see some companies fall. But for now, it’s best to keep trading with the trend. I’d rather be investing in tech right now than the regional banks, but that’s just me.

If you want to get into the AI game, there are other well-known companies that don’t make the headlines as much. Adobe (ADBE) for example, is rolling out the Adobe Firefly generative artificial intelligence into its Photoshop software. Its stock rose 7% on the news.

I hope it goes without saying, but just because I said to trade with the trend doesn’t mean you throw out proper money management rules and your own analysis for the AI-related companies you trade.

The market is closed on Monday. Thank you to all who have served and I hope everyone gets a chance to reflect and enjoy the weekend.

For those who have read this newsletter enough times, you already know the trade that I’m looking to set up today.

It’s on the S&P 500 (SPX) and it’s the holiday weekend trade. I like to place this trade at 2:00 pm EST the day before a holiday. I will walk you through an example of the trade, but the prices and strike price should be adjusted based on the time you’re looking at the trade.

A calendar spread is made up of selling to open a near-dated option while selling a further-dated option, using the same strike price.

In the early afternoon, I will look at the current market price and find the strike price that is closest to the current market price.

Here is the EXAMPLE. Note, DO NOT USE THIS TRADE. This is based on closing prices from yesterday.

The SPX closed at 4151.28.

If 4151.28 is the price of SPX when I go to put this trade on, this is what I’d look to do.

I’d sell the 2 JUN 4150 put (next Friday)
I’d buy the 9 JUN 4150 put (two weeks away)
The current price is 11.85 debit ($1185)

The risk profile looks like this.

The intent of this trade is to take advantage of time decay with the extra time the market is closed.  If the market opened the following Tuesday and happened to trade around the same 4151 level, the estimated profit on the trade would be around $400.  The risk profile looks like this:

I usually look to exit for 10 – 20% of the max profit (the peak of the profit loss graph). In this case, the max profit is $2462, so I’d be looking to exit the trade around $250 in profit.

My exit point would be if the current price crosses either above or below the breakeven prices (small red hash marks).

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.