Tony Zhang Sees Weakness Under SPX & NDX Surface, Offers UUP & APO Options Trades

SPEAKER_1 (0:00)

Do you want to welcome in our next guest, though? Take a broader look here, and we have some example trades for you. Also with Tony Zhang this morning, Chief Strategist over at Options Play. Tony, we'd love to get your thoughts on the market here. I mean, we're kicking the day off with another negative session for now. Got a hotter than expected PMI yesterday. We're in the earnings lull a little bit here until we hear from Micron next week. How are you looking at trading action lately?

SPEAKER_2 (0:24)

Yeah, Marlee, the market right now is largely being driven by interest rates. You have the 10-year yield reaching highs that we haven't seen since 2007 Across the curve, the two-year, the five, the 10-year, all reaching levels that we haven't seen since pre-global financial crisis. This is really what's driving the markets. Now, some of that was driven by higher oil prices over the last month or so, but at the same time, we're also seeing a relatively strong economy running fairly hot that's driving the Fed's need to raise interest rates. We just got the raise last week. Looks like we might get another raise in October, potentially even a third one, if you will, before the end of the year. That's really what's driving the markets right now.

We're seeing that across the board with impact on consumers. We're seeing that in terms of corporate bonds. We're also seeing in government bonds as well. This is having a massive effect on asset classes and rotation within assets. I think it's really important to pay attention to the bigger picture right now as opposed to necessarily being stock pickers in this market environment. Because outside of some select technology names that's driving some outperformance in this market, the rest of the market is really suffering and falling further and further behind. We're seeing financials, health care, utilities, all other sectors lagging behind the S&P 500 If you look at the equal weight S&P 500, continuing to make new lows, even though the Nasdaq 100 yesterday essentially printed record highs, underneath the surface, things don't look so strong.

SPEAKER_1 (2:11)

And so I'm glad you highlighted that divergence between what we're seeing in the mega cap tech and then a lot of these more rate sensitive areas right now. So how are you positioning around this divergence then, Tony? What are you looking at in terms of where you're seeing opportunity?

SPEAKER_2 (2:26)

Yeah, so the first place I'm looking at is simply the US dollar. As interest rates climb to new multi-decade highs, the US dollar is benefiting from that. We're seeing the dollar continue to brine higher from here. So I'm looking at using the UUP ETF, which is the ETF that tracks the US dollar index, and looking at simply buying some call options to seek further upside exposure in this particular stock with ETF with limited risk. I'm going out to the November expiration, which buys me roughly two months of exposure, and I'm looking at buying a $28 call option, which is a call option that's effectively close to $1 in the money. Earlier today, you can pay just a little under a dollar for that call option. So this is a call option that has a break even price that's very close to the current price of the ETF. This gives me upside exposure here for the next two months, while risking only less than a dollar per share, or about $100 per contract.

In this type of market environment, where clearly the bond market is the driver right now, this is really one way that I think you can take advantage of higher yields, and also perhaps use it as a bit of protection against further downside inequities.

SPEAKER_1 (3:44)

All right, and I see that you're also looking at Apollo, but you're on the other side of the spectrum here as you're looking at Apollo. So walk me through your thesis here.

SPEAKER_2 (3:55)

Yeah, if you look at where we see the most damage, by far it's the financial sector that's seeing the most damage out of higher rates. We're seeing banks, we're seeing asset managers, we're seeing pretty much everyone across the board.

You can certainly take a view here, either using a macro trade on something like SPY or even XLF, but I'm choosing to use a stock-specific trade structure here. I'm looking at Apollo simply because private equity has bounced a little bit, even though we saw some pressure in some of these names earlier this year, have bounced so far, and now some of these names that have bounced are starting to show some weakness here. Apollo recently bouncing off of that 115 level, traded all the way up into that 140s, and now starting to push back below into those 120s again. That's really where I think some further downside can materialize here, especially for these asset managers that were exiting the companies in their portfolio in order to generate a return for their shareholders, is becoming a difficult environment for them to do that. And that's really where we've seen some downside for these asset managers. So for Apollo, I'm going out to the October 30th weekly expiration, which gives us roughly six weeks worth of time. And I'm looking at buying essentially an at the money put, vertical, try to buy the 126 puts, selling the 110 puts against that. The 110 puts are effectively the lows that we saw earlier this year, essentially targeting those lows to the downside earlier today. You can pay about $5 for that debit spread, and that will give you a little over a 2 to 1 risk to reward ratio. And that again protects you against some further downside in the financial space if you have some exposure in this particular sector.