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How to play the"market meltup"?

9K views 46 replies 16 participants last post by  james4beach 
#1 ·
I'm betting this US "market meltup" has a way to run, before it eventually implodes. (and the cdn. market will
toddle along behind)., What's the best way to play it on its run-up, on the US, and Cdn. sides? ETFs? Individual stocks? Which ones? Suggestions?
 
#2 · (Edited)
For a short term play you get more bang for your buck with options. If you don't have a particular stock in mind buy one of the indexes like the S&P, Dow or NASDAQ. They all have representative ETFs and options.

Best buy is a call option with around 70 delta.3 to 6 months out. You can buy a Feb 16 18 247 call option in the SPY with 116 days to run, for $1315. It has about $1000 intrinsic value, the rest is time value.

If the S&P runs up to 2770 by February it will be worth $3000. On the other hand if it drops below 2470 the option will expire worthless. So, it is like a lottery ticket. Best to roll or sell about a month before expiry.

There are other possibilities in other ETFs and time periods, that is just an example.
 
#7 ·
Jargey I bought lotto ticket 1 SPX Dec 2018 3500 call for .80

Call will probably expire worthless though if get melt up payout will be good.

Options are cheap right now if get melt up or crash positioned for. Holding OTM puts as well. No melt up or crash options will most likely be worthless.
 
#10 ·
What a great 2017 bubble thread! I remember discussions like this before in 2006 and 2007 back at Yahoo forums. I wouldn't pick individual stocks, since even the institutions these days play these themes using broader vehicles. Here are some ideas, NONE of which I'm doing. Personally I think some of these are only good ideas if they fit within your geographically diversified asset allocation and only in small doses.

  • ASHR: join the China rally. 22% one year return.
  • EEM: join the emerging markets rally, overlaps with China. 25% one year return.
  • SSO: leveraged S&P 500 index, not a bad vehicle actually. 47% one year return.
  • XIV/SVXY: bet on declining volatility. 186% one year return.

I think all of these will benefit from a market melt-up. Personally I think the S&P 500 index is ground zero for the equity mania, so if I wanted to play a melt-up, I'd probably use SSO or XIV (which are 1st and 2nd order derivatives of the S&P 500). The 5 year annualized return of SSO is 28%, and for XIV it's 46%. Annually!

WARNING: my guess is that those derivatives will crash 70% to 95% once volatility returns and the US market falls.

So if you want to get crazy, you can definitely go this route. For the record, I have 25% exposure to stocks and far more money in cash & fixed income.
 
#24 ·
  • ASHR: join the China rally. 22% one year return.
  • EEM: join the emerging markets rally, overlaps with China. 25% one year return.
  • SSO: leveraged S&P 500 index, not a bad vehicle actually. 47% one year return.
  • XIV/SVXY: bet on declining volatility. 186% one year return.

I think all of these will benefit from a market melt-up. Personally I think the S&P 500 index is ground zero for the equity mania, so if I wanted to play a melt-up, I'd probably use SSO or XIV (which are 1st and 2nd order derivatives of the S&P 500).
Just for fun - purely for entertainment - checking on these melt-up trades since this post,

ASHR +3.1%
EEM +2.1%
SSO +2.0%
XIV +4.1%

All are doing better than the S&P 500 and TSX index. Party on!
 
#12 ·
Further to the above. Any option is a compromise between low price and chance of ending up in the money. If you buy very cheap options the chance of making anything at all, is small. The more expensive the option the more chance you have. The 70 delta rule is a popular rule of thumb among option pros. They consider it a good compromise between cost and value. That is all. You could just as easily take a flyer on an out of the money option if you think there is a small chance the thing will take off like a rocket.
 
#13 · (Edited)
Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
So is the inverse rule of thumb that options sellers generally want to avoid selling ~70 delta options?
 
#15 ·
Professional option sellers couldn't care less. They will sell you anything you want, provided they get more for it than it is worth. This is the bid/ask spread. They will buy or sell puts, or calls, ITM or OTM all day long. At the end of the day they will figure out their position and if it is too heavy to the long side, hedge by buying stock or SPX options, or vice versa. Their object is to collect more premium than they pay out and hedge any risk. I am talking about market makers with millions or billions to invest.

I sell calls against my stock positions for the extra profit. I prefer to sell out of the money calls with 85% chance of expiring worthless. This allows me to make a little money with minimal risk of losing my position. If the option gets hit I will roll it out in time and to a higher strike.
 
#14 ·
Maybe wait until they raise interest rates a few more x to to get more reasonable US valuations. There may be another raise in the US in 2017 and if not definitely in 2018 which should cool growth and valuations to more normal levels. The federal funds rate is still only 1.25%. The rate forecasts are 2.5% for 2018. If they hiked interest rates 1.25 % tomorrow markets would correct ~ 10 % from that alone.

For now low vol more fairly valued EAFE ETFs and some assets that benefit from interest rate hikes.
 
#20 · (Edited)
Premium is inexpensive now. When premium is inexpensive going into the money & paying intrinsic value to reduce premium cost is less important.

In March of 09 was buying deep in the money calls to reduce premium costs, as options were expensive


Playing possible large moves up or down if market goes against me in large way & sitting with options with a lot of intrinsic value there is a high risk to losing intrinsic value.

The market moves down faster then up & if looking to play possible crash will play long OTM puts

The market moves up slower then it does down to play upside will play long ITM calls for stock indexs

The 1 far OTM call on SPX was a play on a possible phase transition such as DJI made into 1929 top, Nikii Dec 1989 top & gold into the 1981 top. A phase transition does not happen very often & the odds of buying OTM calls to catch one the odds are against which is why payout will be high.
 
#26 ·
What on earth is happening with Chinese stocks in the last few days?

The Shanghai Composite was up nearly 6% on Monday, several big up days in a row. ASHR (tracking the Chinese A-shares market) was up 11% on Monday. That's up 16% in three days.

Scanning some headlines, it seems that Chinese state media is encouraging stock buying, but I have trouble believing that this is all it takes to cause this kind of movement. Could this become a repeat of 2014-2015? During that time, ASHR went from $16 to $40 (more than doubled)

I would think that the Federal Reserve's money printing has a role here as well. It could be both Chinese domestic stock enthusiasm, plus foreign investors using things like ASHR to chase the next big bubble.

Maybe we'll get simultaneous bubbles in QQQ and ASHR? Boy would that be exciting.
 
#27 ·
Here is the year-to-date return of a few things, all converted to CAD:

S&P 500 (using ZSP) ... 4%
ASHR, China index ... 22%
NASDAQ (using ZNQ) ... 27%
Canadian tech (XIT) ... 42%

Let me remind you, these ^ are just 2020 returns! As in, if you bought right before the pandemic, you'd now be up 22% for China, up 42% for Canadian tech.

Does anyone think that these might continue performing spectacularly through the rest of this year? This could be an amazing year for bubble areas.
 
#36 ·
There's a growing belief that for the last few months, institutions have used options to manipulate the market and drive this crazy rally

Options Traders Whipped Up Stock Boom With SoftBank Buying

Analysts believe that aggressive call buyers, like at Softbank, pushed the market higher with outlandish call positions -- 10s of billions $ of pure call options, without disclosures. This resulted in a feedback loop and more general buying.

If this is true than you should NOT want to join this rally as it means it's not based on fundamentals, or even on investor sentiment.
 
#40 ·
This something very interesting that I haven't been able to figure out. What is their strategy with this call buying frenzy? Are the LEAPs or short term options? With billions of dollars in investable funds, do they still need leverage?

How are they going to unwind those positions? The only way I can think of is if they exercise them. Otherwise dumping so many calls will crash the market and make a decent exit impossible.
 
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