🗞 A Bull Call on China

WHILE YOU POUR THE JOE… ☕️
Another Reason to Follow

One of the highlights of our portfolio, which is public on our Twitter account, is the long bonds position we took through the $TLT bond ETF.

It seemed weird, but the ETF reached $100.6 on Friday morning, I was starting at a 62% return 🔥 on my call options position, then something weird happened…

No more buyers

I sat there facing no buyers at that high, which is a new quarterly high, and to me, that means something is weakening underneath this bet. Now, I am long-term bullish on these bonds, especially now that the yield curve has been uninverted and could create a rally for them.

However, I cannot ignore the evidence in front of me, so I took profits to potentially enter on a better day.

This is the tweet we sent right as we considered taking money off the table and minutes after the ETF sold off by over 1% 📉.

Speaking of making the right call before it runs, let’s get on with today’s email 📧…

TRADE LIKE THE PROS
An Unfair Set Up

Chinese technology stocks are now at their lowest valuations in history, and that, to me, means opportunity rather than risk.

Look, I’ve been long (very long) on Alibaba for over two years now. While that time has been mostly spent in long stock and selling call options on my position to collect income, I think now is the time to get a bit more aggressive.

Why?

Michael Burry, David Tepper, and even George Soros have bought into the stock recently. We have a pretty good idea as to why they chose this quarter and not before.

It’s because they just got confirmation in the biggest of ways. We wrote about Alibaba's primary listing in Hong Kong in another post if you want to review it.

Here are the cliff notes:

If the primary listing price is above the New York listing, it could trigger billions of dollars in buying pressure for Alibaba stock as an arbitrage play.

More than that, it could also force institutional players like MSCI to increase their holdings in Alibaba 📈.

How We’re Playing It

Apart from being long the stock, I do have a better idea for our retail audience to play this upside, just like the investment banks and hedge funds like it.

In essence, you’re looking at very little downside in exchange for a massive payoff here.

In the chart above, you’ll notice the low-volume areas of $79-$80 on Alibaba, which represent our first entry point.

Moving higher to the area right at $84.6-$85.75, that’s where you could enter if you don’t get a chance to get in the lower area, and that would be where we double down on this play.

Our immediate price target for this trade is right at $98- $100. Keep in mind that our long-term 5+ year target valuation on this stock is closer to $350-$400 🎯, but we’re talking short-term trades today.

Okay, so how do you get the massive payoff with minimum risk?

We’re selling September 20 call options for a $85 strike, which trades at around $82 per contract.

At the same time, we’re buying November 15 call options for $85 strike, trading at $445 a contract.

This is known as a bullish calendar spread.

The short calls have a delta of negative 26, so we need to now hedge against that delta through buying enough of the November call options so we’re closer to neutral.

Our long delta here is 43, nearly twice the short delta from the September calls.

This is a good thing since we are bullish on the stock, and all momentum points to the upside; we want to buy 2 November calls for every 1 September call that we short.

This is the payoff chart in a nutshell:

Essentially, we have two scenarios here. There are more than that, but we are keeping it simple here.

If Alibaba gets to $100 by November, then we essentially lose $488.8 on our short calls (if the stock moves before September 20). At the same time, we make $808.4 on our long calls, for an 88% return on our initial investment 🔥 of $363.

Keep in mind, if Alibaba is below $85 by September 20, we boost this return to over 100%.

Now, if Alibaba is still at $85 by November, then we essentially collect the premium of $82 on our short calls and make an additional $163.4 on the long calls.

Either way, you look at it, it’s a very large payoff in percentage terms.

The risk?

If Alibaba breaks down below our low-volume areas, then we simply close the long side, let the short calls ride until expiration, and take the profit.

We are looking at 7 short calls and 14 long calls, so our expected P/L looks more like:

Welcome to the professional side of trading, it’s just moving inventory around and covering your risk, making sure your reward is always greater 📈.

TRADE OF THE WEEK
Ready For Takeoff

I might be getting ahead of myself here, but this rocket could be ready to take off. I'm not talking about SpaceX; I'm talking about Rocket Companies (NYSE: RKT).

I've been bearish on the housing market for a while now, and I do not think this will be a good payoff for the next 6-18 months, but as a 1-3 month trade, I think it looks good.

Why?

We have the lowest mortgage market index since 1996 📉, and we also have a bunch of millennials coming of age and looking to buy a home, as they are now between 26 and 32 years old.

Even though home prices to income ratios are at all-time highs, some markets, like Florida and Texas, have started to cool off.

Again, this is not going to be a straightforward trade, nor a long-term one, as homebuilders have yet to show further strength. If anything, homebuilders are scared that housing demand is going to fall off a cliff.

We wrote all about it in our short thesis for Toll Brothers (NYSE: TOL) a few posts ago.

Anyway, why am I still considering a bull run in this stock despite how bad the housing (and mortgage) market looks right now?

Because the company holds up to $9.4 billion in mortgage loans held at fair value. Here’s a friendly reminder: The value of loans (bonds, mortgages, etc.) goes up whenever the yields/rates come down.

So, now that the Federal Reserve is set to lower interest rates on September 18th, mortgage rates will fall.

In fact, they’ve been falling for the past quarter now, which, in my opinion, drove the massive 40.1% rally 📈 after the company’s latest earnings, which showed an increase in mortgage loan values from $6.5 billion a year prior.

If mortgage rates keep on falling, as they are right now, Rocket could report a much bigger balance due to the value of these loans, bringing its book value higher.

But, there’s one problem, SoFi Technologies (NASDAQ: SOFI) is also a worthy competitor in this area, but here’s where I untie the score:

Rocket is taking lots of market share in this segment to begin with. Market capitalization (which often acts as a proxy for expected success) is much bigger than SoFi’s at $39 billion versus $8.5 billion.

This is why we’re picking them over SoFi, and the market agrees by placing a higher premium on Rocket, mainly through:

• Forward P/E ratios

• Price / Book ratios

• Price / Sales ratios

Now that the deal has been broken through, let’s take a look at the chart to figure out where we stand and whether we can start to look at a trade today.

It looks like we’re at a low-volume node at the moment, or at least approaching it, as pointed out in the gray area.

This means two things: We either see lots of responsive buyers come in to push the stock back up, or we see no volume, and the stock breaks down below $18 📉.

We’ll be watching this situation closely, but at least the catalyst is defined for around November, when the company announces its next set of earnings.

If we get the bounce from buyers, the price target (initially) is set at $20-$21 but could easily break higher on good results and volume during earnings.

This is the options chain for December 2024; notice that the contract with the most open interest right now is for the $20 call options 👀, right at the price target to confirm our thesis.

Here’s a few other data points to consider as we approach this low-volume node:

We see some of the volume starting to pick up in the past two days (Thursday and Friday last week), which is good heading into that low-volume area and means we could be attracting some buyers.

Also, volatility, on an ATR (average true range) basis, is now above the 5-year average, meaning we should see a volatility contraction in the next few days, an event that typically follows higher stock prices 📈.

The fundamentals and technicals make sense here, so we will be watching this situation closely as we approach the low-volume area to enter on new responsive buying.

NOW GO AND MAKE IT HAPPEN
Crystal Ball Made Easy

I have plenty of reasons to be (and stay) bullish on Chinese stocks. Still, it didn’t come to me as a copy trade or a sudden idea. I have been studying China for a while, and all of the indicators suggest that the biggest opportunity of my life is right there.

Today’s book recommendation 📖 will help you understand a bit further how and why China is so important for your future and investments. Keep an open mind and forget the American propaganda against Asia’s powerhouse.

To your success,

G. 🥃