EB Daily Market Report - Friday, November 18, 2022

Tom Bowley - November 18, 2022

One last quick update to close out this options related week....

New Portfolios

Last night, we announced the 10 equal-weighted stocks that will be included in our 3 portfolios. For portfolio calculation purposes, they will be "purchased" at TODAY'S CLOSING PRICE. Here are the stocks in each portfolio:

Model Portfolio:

ON Semiconductor Corp (ON)
Dropbox, Inc. (DBX)
Apple, Inc. (AAPL)
Starbucks Corp (SBUX)
International Game Tech (IGT)
Netflix, Inc. (NFLX)
United Airlines Holdings, Inc. (UAL)
Goldman Sachs (GS)
Insulet Corp (PODD)
Murphy Oil (MUR)

Aggressive Portfolio:

Lattice Semiconductor (LSCC)
Doximity, Inc. (DOCS)
Enphase Energy (ENPH)
Lululemon Athletica (LULU)
Crocs, Inc. (CROX)
Sprout Social, Inc. (SPT)
First Cash (FCFS)
Silk Road Medical (SILK)
DexCom, Inc. (DXCM)
ChampionX Corporation (CHX)

Income Portfolio:

International Business Machines (IBM)
Automatic Data Processing (ADP)
Apple, Inc. (AAPL)
McDonalds Corp (MCD)
Lowes Companies (LOW)
Booz Allen Hamilton Holding Corp (BAH)
The Travelers Cos, Inc. (TRV)
JP Morgan Chase & Co (JPM)
Humana, Inc. (HUM)
PepsiCo, Inc. (PEP)

We "purchase" these stocks at today's close and "sell" them on February 19th at the close. If February 19th falls on a weekend, then they will be "sold" at the Friday close prior to that weekend. We are NOT Registered Investment Advisors (RIAs), so please consult with your own financial advisor before purchasing any of these securities. There is risk of loss in every security mentioned above. Many of the stocks above are growth stocks and 2022 has not been kind to growth stocks. They were added to the portfolios due to my belief that inflation will begin to moderate and interest rates will decline, a much more favorable environment for growth stocks. However, if I'm wrong in my assessment, growth stocks would be much more likely to underperform.

Options Expiration

We've received questions about comments in the DMR yesterday about the large number of puts traded on Wednesday, with the equity-only put-call ratio soaring to 1.46, the highest reading on record. Specifically, questions surrounded the impact this might have on max pain. Well, without even looking at max pain, I can tell you that there is no impact to max pain if this heavy put interest is concentrated well "outside the money". In my experience, max pain will generally move towards current price in the final few days prior to monthly expiration, but usually not a significant amount. I recalculated max pain earlier in today's session for the SPY, QQQ, and NVDA. First, I'll give you the numbers as of Tuesday's session, followed by the numbers I calculated earlier today:

SPY (Tuesday at max pain event):

Price: 398.49
Max Pain: 379.60
Total options payout: $1.79 billion

SPY (Calculation earlier today):

Price: 393.49 (price at time of calculation)
Max Pain: 380.13
Total options payout: $1.46 billion

Max pain rose by .53 from 379.60 to 380.13, so not much. But notice the drop in payout from $1.79 billion to $1.46 billion. The decline over the past few days saved market makers (cumulatively) $330 million. The directional move that we anticipated occurred to some degree. In other words, max pain worked as a directional clue.

QQQ (Tuesday at max pain event):

Price: 289.39
Max Pain: 276.78
Total options payout: $837.16 million

QQQ (Calculation earlier today):

Price: 283.45 (price at time of calculation)
Max Pain: 277.42
Total options payout: $619.69 million

Max pain rose by .64 from 276.78 to 277.42, so not much. But notice the drop in payout from $837.16 million to $619.69 million. The decline over the past few days saved market makers (cumulatively) $218 million. The directional move that we anticipated occurred to some degree. In other words, max pain worked as a directional clue.

NVDA (Tuesday at max pain event):

Price: 166.66
Max Pain: 136.86
Total options payout: $513.02 million

NVDA (Calculation earlier today):

Price: 152.24 (price at time of calculation)
Max Pain: 140.54
Total options payout: $325.85 million

Market makers saved an additional $187 million on NVDA. This little 3-day pullback saved market makers $735 million on these three securities alone. Imagine the total thievery that's taken place unsuspectingly by retail options traders. This is why we do this analysis EVERY SINGLE MONTH. Crooks are at work and you need to be aware of it to help protect your capital.

To be fair, not every max-pain-related trade works. Both of the long candidates that had net in-the-money put premium (COIN and LCID) were expected to rally into options expiration. Instead, they went the other way. Neither traded light volume, however, and that makes it much more difficult for market makers to manipulate prices. Remember, they very likely (almost certainly) protect themselves by shorting the underlying stock, when simultaneously selling puts to retail traders. That protects the market maker in the event that prices continue to decline, which, in these two cases, they did.

Happy trading!

Tom