Alan's Alert 7-8-2021

 

Another day, another labor report.  Unemployment insurance weekly claim reports were updated this morning by the Department of Labor.  Below are the charts for initial claims and continued claims;

Initial claims are continuing their trend lower.  Today’s report showed an increase in claims, but the trend is the key.  With initial claims at 373k, we are still 168k claims above where we were pre-pandemic.

Continued claims were reduced 145k to 3,339,000.  Again, well above the pre-pandemic baseline but continuing the trend lower.

In the DOL’s data release, we got a look at the change in those receiving pandemic related unemployment money.

Looking closely, you can see that 464,663 people have been removed from the pandemic unemployment benefits.  However, there are still over 10.7M on some form of pandemic related unemployment assistance.

 

In more broken record adventures, the FOMC released the minutes of their June meeting yesterday.  A lot of words were used but not a lot was said.  Members were surprised that the actual rise in inflation was larger than anticipated.  However, this did not set off any alarm bells.  In a repeat of the 1970s, the rise was attributed to supply constraints or bottlenecks and not monetary policy.  The word ‘bottleneck’ was used 8 times in their meeting minutes.  There was talk of reducing the number of mortgage-backed securities (MBS) and treasury bond purchases.  Ultimately, they kicked the can and stated that they would, “continue assessing the economy’s progress toward the Committee’s goals..”.  If one of those goals is full employment, the Fed will be behind the curve.  The disconnect in the labor market will be here until those 10.7 million Americans on the emergency pandemic relief join the labor force.  Unfortunately, the vast majority won’t leave the dole until the relief is ended in September.  By then, it will be too late for the Fed.

 

 

Yield Spread Check

The above chart shows the spread between the 10-year treasury interest rate and the 2-year rate.  The spread is well within positive territory with a difference of 115 basis points.  While there has been a sharp downturn since March, keep in mind that a recession generally does not hit until the spread is negative.

 

 

 

Alan’s Options Primer

Volume 2

Today is post 2 of 3 in my options primer series.  If you watched the videos, you’ll be ahead of the game today.  As a reminder, I only have two rules when trading options.  They are hard to follow but there is only two of them.  My first rule of trading options, do not trade options.  My second rule of trading options, DO NOT TRADE OPTIONS.

 

Option contracts represent an agreement to exchange a specific number of shares of a particular stock, at a preset price, on an exact date.  The number of shares in a standard contract is 100.  The preset price is called the strike price.  The exact date is called the expiration date.  Unlike stocks, all option contracts expire.  This is one of the many reasons that it is very easy to lose money trading options.  Another thing to keep in mind, buying an option offers the right, but not the obligation to purchase (or sell) the underlying stock.  The vast majority of contracts that have value at expiry are settled in cash, not stock. 

 

There are two types of option contracts, calls and puts.  By purchasing a call contract, you are indicating that you want to purchase the underlying stock.  A put contract means the opposite, that you want to sell the underlying stock.  

 

Now, it is important to remember that a trade can move against you, making your options go down in value rapidly.  It’s vital to set mental limits on how much you are prepared to lose.  Not every trade is going to work out in your favor.  It is best to cut your losses and have enough ammo to fight another day.  Seeing a position down 50%, 80%, or 90% is mentally taxing and can negatively impact your future trades because you’ll think about “making up” the loss.

 

There are three primary factors that determine an option contract’s price.  They are; the price moves of the underlying stock (delta, gamma), time until expiry (theta), and volatility (vega).  These factors are given Greek letters because the pricing of option contracts is based on mathematical formulas.  The most popular of these formulas is the Black-Scholes model.