Asymmetric 10x trades for a disinflationary 2024
The market is getting bulled up for a Fed pivot and rate cuts in 2024. It started off earlier this month with a string of bad US data, after which I noted that the US economy has reached an inflection point where the weakening should gather speed. Last night Fed member Waller made some surprisingly dovish comments (increasingly confident Fed policy well positioned; if inflation stays at similar readings for three, four or five months could see lower rates), which kicked off another rally in Treasuries. A poor 7 yr Treasury auction didn’t hold down the market for long, and Bill Ackman poured fuel on the fire by declaring on the David Rubinstein show that the Fed will likely cut sooner than expected.
I’m inclined to listen to what the market is telling me, as well as listen to Ackman, who has been calling global macro pretty well for a long/short equity guy. 10 yr yields have broken key support:
2 yr yields have broken down from a range:
When the Fed cuts, they will likely follow with an end to QT, which should help alleviate the pesky problem of too much Treasury supply weighing on the market. Downward economic momentum may keep financial conditions trending lower for a while, creating conditions for some explosive upside moves in risky assets going into 2024.
By now you are likely getting 2024 outlooks from every bank and research firm you subscribe to. I’m going to make this a little more fun and throw out five option ideas with some huge convexity that could potentially make 10x or more. These are trades I’m allocating a small portion of my portfolio to - around 5%, with the expectation that at least one of them will be a home run and contribute meaningfully to my returns next year. The first one is free, but the other four are behind the paywall.
By the way, none of this is financial advice. Most options have a lottery ticket-like return profile and lose all their value. Why else would I have a picture of a roulette game in this post?
Crypto equity calls
My view is that we have seen the bottom of the crypto winter, and that the launch of the bitcoin ETF (along with potentially more crypto ETFs to follow) and easing financial conditions should deliver some asymmetric upside returns going forward. Coinbase has broken out of an 18 month base after it cemented itself in the epicenter of the crypto ETF boom. Its main competitors, Binance and FTX, were weakened or taken out of the game in the crypto winter.
Since bitcoin hit rock bottom in Q3, COIN has been lagging upswings in bitcoin by days to weeks. In the latest runup to 38k, COIN did nothing for 2 weeks, and then finally started to rally. Based on the chart below, COIN should be trading closer to 180 instead of where it is today.
I’ve purchased some calls on COIN expiring in June with a strike at 200 (currently 127). If crypto spring has truly arrived, then COIN could very well reach $250-300 within the next half year, and the calls (which are trading at $11 today) could deliver a 10x return on the premium.
Crypto mining company Riot Platforms (RIOT) also tends to be a laggard to bitcoin during crypto winters. Once it catches up to the bull market in bitcoin, the moves can be explosive. I’ve purchased calls on RIOT expiring in June with a strike at 20 (currently 12.83). If it behaves anything like how it did in the last bull market, RIOT should blow through that strike and the calls (trading at $2.15 today) should multiply by at least 10x.
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SLV calls
Silver has been in a choppy range since mid-2020, but just broke above a daily trendline with strong momentum. I know I've been writing about gold, but silver is like gold on steroids, and can significantly outperform gold in a global cyclical upswing due to half of the metal's demand coming from industry. Silver is a key component of solar panels, which China is building record amounts of with each year that passes.
Silver is a green bar away from breaking out of a trendline that has been keeping a lid on rallies since mid-2020. Like gold, dips have been readily bought, helping silver bide its time until the next precious metals bull market.
When we zoom out, we can see the next bull market could potentially take silver up to the $40-50 range, which was where the last bull market topped out.
I’ve purchased calls on the silver ETF SLV, expiring in June with a strike at 28 (which corresponds to the 2020 high). Both gold and silver are on the verge of significant technical breaks to the upside, aligning with the prospect of a Fed pivot. SLV is currently trading at 22.93 and the calls are trading at 0.69.
Calls on Annaly Capital Management (NLY)
This idea is a contribution from a family office portfolio manager friend of mine.
Annaly Capital Management is a fund that buys mortgage securities on a leveraged basis. As you can see it’s made triple bottoms at around $15 with high volumes (ie stop losses). If rates get cut, it’s a 5x. It pays a dividend yield of 15%, so you will get additional return from holding it.
To juice it up, the Jan 2025 at-the-money call is around $1. It’s cheap because the dividend is so high. You could potentially get 20-50x, depending on how deep the rate cut is. However, if yields go higher, NLY will go much lower. The call option will protect your downside. I have it on my book as a cheap hedge. Remember it’s a hedge and not an investment as you can lose all your money on it.
Calls on KRE (Regional Bank ETF)
The selloff and inversion of the Treasury curve was what led to the demise of Silicon Valley Bank, First Republic, and Signature Bank back in March of this year. The Fed stepped in to provide liquidity, keeping the regional banks alive, but the root cause of their stock prices getting hit has remained. However, if Treasuries rally and disinvert, that would reverse the process and provide significant relief to regional banks. They are trading for dirt cheap and are just waiting for a catalyst to rally. If hearing it from me isn’t enough, here’s a smart person named Bill who also likes the idea:
I’ve purchased calls on KRE with a strike at 55, expiring in June. The ETF trades at 45.40 today and the calls trade at 1.06.
Calls on KWEB (China Internet ETF)
China has been going through a rough year, but sentiment is so bad right now that it’s hard to imagine the market getting any more pessimistic. However, economic data has been improving and the government has been throwing all kinds of fiscal and monetary stimulus at its real estate debt crisis. I would like to include more charts and data to back up this thesis, but I need to get some sleep so I’ll save them for another post.
Xi just met with Biden in San Francisco, and that should have been a bullish event but the market reaction went the other way due to the press quoting Biden out of context saying “Xi is a dictator”. At some point next year, the market is going to wake up and realize things in China are not as bad as they seem. Chinese indices, which have been beaten down and are at historically cheap levels, will rip higher.
I’ve purchased calls on KWEB expiring in Jan 2025 with a strike at 45. The calls are trading at 0.91 today, with the ETF at 27.90.
Disclaimer: The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The blog is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this blog is not a registered investment advisor or financial planner. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.
Geo, do you have a core thesis on being a BTC and crypto bull? I understand the view that the USA national debt & deficits will spiral with no solution, and Fed will have to come back in with QE to buy UST. And the idea is this will lower the value of the dollar. Where BTC since it has limited supply will hold value better. Basically the "digital gold" thesis.
Is there anything else I'm missing about your long term view of crypto and BTC? Why we will need this?
I'm not very knowledgable on crypto as there is only so much time in a day and I haven't taken the time to do a deep dive. I know there are more "murky" bigger ideas of it being the underpinnings of a new financial system, DeFi. etc...