April 27th, 2023

The Market Cheers For Mass Layoffs

Sometimes bad news pays off, and that’s what is going on as we take a deeper look into this earnings season. I’ve mentioned it before but earnings-per-share growth is coming from a reduction in expenses more than an expansion of sales.

We saw that on display yesterday as Meta Platforms (META) had blowout earnings. Part of that is due in part to reducing their workforce and another large part comes from reducing their side projects like their virtual reality initiatives.

On a weekly chart, you can see that the market is rewarding META’s layoff initiatives (ahem, I mean their elimination of wasteful expenses). The stock has already doubled from about $100 in November of 2022 to $238 just six months later.

The tech sector is rising once again on the news and it seems the way to win over investors is to show that you’re aggressively reducing the fat from the workforce. There are some investors that want to see META cut 80% of its workforce like Twitter did.

In another case of “bad news is actually good news,” the U.S. economy grew slower than expected in Q1. The gross domestic product rose 1.1% which was weaker than the 1.9% that was expected. That was enough to yet again convince investors that the Fed may be nearing the end of its rate-raising phase. Yea! Slow growth and mass layoffs! The economy must be moving in the right direction!

I’m not as convinced this rally has legs. It had a nice pop after tech earnings, but it would be nice to see more companies contributing to the move higher rather than being dragged along.

There’s only one more day of trading to add to the far-right weekly bar and that’s not exactly the most bullish-looking weekly candle. Yes, we’ve come off the weekly low and are sitting at the weekly high, but we’re looking to finish at the same level as last week.

That’s the second time we’ve hit this level in two months and we haven’t been able to break through, even after some great numbers coming from earnings announcements.

Obviously, my opinion will change if we get more positive earnings and the S&P 500 can finally break higher out of this range, but right now it looks like a good time to buy the dips and sell the rips.

With the market ripping higher on tech earnings yesterday, we saw call option premiums balloon higher. So, I’m looking at a bearish stock that I can use to sell inflated call premiums.

That led me to United HealthCare Group (UNH). The stock has retreated from $500 per share for most of this year. I think yesterday’s price action was more about the broader market than this stock’s performance.

Now, it could retrace up to near the $500 level before going lower, meaning there could be a few more days where this stock trades higher and that would allow you to get an even better price on a bearish trade if you want to stalk the trade a bit longer before entering.

I’m looking at a quick and easy bear call credit spread.

That means selling to open the 12 MAY 500 call.
That means buying to open the 12 MAY 505 call.

The market is closed at the time I’m writing this, but it’s going for around $1.39 in credit.

That means your potential max gain is $139 with a max loss of $361 per credit spread. If you hold on through expiration and this trade wins, you’d get a 38% profit on risked capital. Not bad for a trade that closes in about two weeks.

Volatility in the options chain for UNH is expected to drop over the next couple of weeks and that should help the options decay faster. Of course, getting the correct direction is far more important, but if the stock does start heading lower, a drop in volatility will help accelerate profits in this trade.

It was a busy week for me, but I hope you had a great week of trading! I’ll be back next week and we’ll go over everything you need to know!

Have a great weekend!

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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.