March 21st, 2023

Quantitative Easing Returns, Lifts Stocks as UBS Agrees to Buy Credit Suisse

As I mentioned yesterday, Quantitative Easing is back with a new name, and that reduced liquidity concern lifted stocks to start the week. Bank stocks recovered as UBS agreed to buy Credit Suisse for $3.2 billion.

Now, short term that’s great news, but investors in UBS weren’t thrilled that the biggest Swiss bank agreed to take control of its ailing competitor. You typically applaud buying strength, not weakness. Time will tell if the decision was the right one.

In an effort to ease strains in the global financial system, the Federal Reserve, Bank of Canada, Bank of England, European Central Bank, Bank of Japan, and Swiss National Bank announced they would increase the frequency of 7-day maturity operations from weekly to daily.

As such, stocks rebounded as bank jitters subsided for the time being. But it’s a fragile market and a big Fed announcement is coming on Wednesday of this week.

Again, I think the Fed will do what it’s expected to do, which is a 25 basis point increase.

Anything more to fight inflation would send ripples back through the banking system. Anything less would show the Fed is not confident the banking system can survive, and that’s a bigger concern.

Where are the markets now? The S&P 500’s (SPY) weekly chart is off to a good start.

We held the previous resistance line as it changed over to a support line. We’re still at a critical level and need it to hold through the volatility this week, but making it higher than $407 would go a long way to making bullish investors feel better after a tumultuous last week.

Today’s trade idea is using Coinbase (COIN). They are in the financial and stock exchange business, specifically one of the leaders in trading cryptocurrency.

I won’t sugarcoat it – the industry is tough and the fundamentals are less than stellar, but it kept hitting on a momentum scan that I’ve been working on. I’m specifically trying to find short-term cash-secured put option ideas with this scan.

Like every idea, this is for educational purposes only. And this momentum scan I’m testing is brand new, but here’s the chart and the option that hit the scan, using yesterday’s closing prices.

I’m trying to find a put that passes a certain reward:risk criteria and is less than the low from three bars ago. That low is $63.12. The 24-MAR 63 puts are going for somewhere between 0.63 and 0.69, using yesterday’s after-market prices.

Let’s say you can get about 0.66, that means your investment cost is $6,234. If COIN stays above $63 by this Friday, you get to keep the $66 credit that you received. Of course, you can close out of the trade earlier if you want to for something like a 50% profit target instead.

A $66 gain on a $6234 investment is a 1% return in a week or a 52% annualized rate of return. With COIN trading at $75.14, the stock can move lower by 10% in a week and still have room before having shares put to us. Of course, you can always roll out in time before that happens, or accept shares and sell covered calls.

Now, we just need the momentum indicators to be right about the direction.

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. 


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