February 24th, 2023

Market Moves Higher In The Face Of Skyrocketing Credit Card Debt

Yet another rollercoaster ride in the market happened yesterday as reports of GDP came in less than expected at 2.7% vs 2.9%. Then the jobless claims came out and showed the job market continues to be resilient. Claims came in at 192k instead of the 194k that was estimated.

That means the Fed will need to have more restrictive policies going forward or at a minimum, they will be keeping the rates higher for longer, as we’ve been talking about all week.

Have we priced in the possible Fed moves? Are we hitting support and moving higher or will we have a trend break?

Normally when the U.S. credit card debt jumps 18.5% and hits a record $930.6 billion, you’d think that’s not great news. Inflation and interest rates are hitting some lower-income Americans, but the majority have been able to shrug off the idea of a recession. Job openings still outweigh available candidates.

So, yes, credit card interest is skyrocketing over 20% and more consumers are returning to old habits of adding to their debt and depleting savings. Consumer debt has caught up to pre-pandemic levels.

It could be an issue later, but as long as the job market continues going strong, I think the markets will follow. It may not make any sense, but investors keep spending on goods and on stocks.

Today’s trade idea is on Twilio Inc (TWLO). The stock has been in a solid uptrend since the beginning of the year. While it has fallen from its recent high, it’s coming back down to a level of support and could provide a good entry to get back in, if the chart holds up.

The stock’s implied volatility is low right now, with an IV rank of 14 out of 100. Since options increase in value as volatility rises, I’m looking to take advantage of this low volatility and am looking to buy an option spread.

This is done by purchasing the 21-APR 65 call while simultaneously selling the 21-APR 70 call.

Here’s the risk graph.

You can see that the stock needs to move higher, up to $67 before this trade would break even if you held it through expiration. However, any move higher from here will be profitable in the short term as viewed by the purple, daily profit line.

The trade has a max risk of $213 and a max reward of $287, so it’s better than a 1:1 risk-to-reward trade.

That’s it for me this week. I hope you have a great weekend and steer clear of any winter storms or stay out of the record heat if you’re in one of those areas.

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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.