September 06, 2022

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TOGETHER WITH

Good day to you all. According to Financially Simple, all economists agree that predicting a stock’s price is tough. Can you guess what percent of Americans agree with that statement? a. 59%, b. 69%, c. 79%. Follow the wave 🌊 below for the answer.

The investing topics for today are:

Options are weighing on volatility
Luxury brands going all in on NFTs
Defenses against a receding rally

MARKET OUTLOOK

Options Are Weighing on Volatility

It’s been a pretty rough year for investors. We’ve grown accustomed to watching markets whipsaw while weighing an array of catalysts, and it’s become nothing unusual to see intraday swings of multiple percentage points of major indexes.

There are a number of individual reasons behind this phenomenon, but all of them come together to exert a force on one increasingly popular market mover—options contracts.

Some basics: Options give investors the right, but not the obligation, to buy or sell a stock at a given price (strike price) before a specified expiration date. They have multiple uses ranging from multiplying your returns (or losses) to hedging and are a part of most advanced investing strategies in use today.

How options are driving 2022’s volatility

Nature of options: By their very nature, options will inherently exert influence on the market. Options have expiration dates that often congregate around certain days across thousands of stocks, and when these options get exercised it triggers buy/sell orders across the market, further influencing price action and sentiment.
Options popularity grows: Just five years ago, we logged about 3.6 trillion options contracts traded during 2017, and in 2021 that number rose to 9.3 trillion, almost a 3x increase. We’re on pace for similar numbers this year, and this increased activity weighs heavily on the markets.
Self-fulfilling prophecy: As options have grown in popularity, investors have become increasingly obsessed with tracking them and any sentiment they might convey. Because of this, most trading savants and big funds know exactly when and what options contracts are up for expiry, and they’ll make their trades accordingly.

Looking ahead

Options have added fuel to what’s already been a volatile fire this year as we deal with a variety of uncertain catalysts at hand. With many of those like inflation, rising rates, and more yet unsettled, volatility will continue.

The closing months of the year have also recently become known for rallies and heightened levels of volume, and are also home to increased options activity. What does this all mean? Can’t say for sure, but we’d humbly suggest strapping in.

CRYPTO & NFTS

Luxury Brands Going All In on NFTs

Trends rise and fall quickly, and only time will tell if a popular one will actually stick around.

NFTs are one such trend where their fate is still undecided. Amidst bearishness in all kinds of markets this year, NFTs have suffered too—weekly transaction volume has dwindled from a high of $1.1B the first week of May to about $29M last week.

Despite this, luxury brands are taking to NFTs, snapping them up and often creating their own variations as they venture into this nascent online world.

Like who and why?

The designers: ApeCoin is an Ethereum-based token that’s governed by the ApeCoin decentralized autonomous organization (DAO), and Gucci just announced last month they’ll be accepting it as a form of payment. They’re not alone though, brands like Balenciaga, Tag Heuer, and even Pacsun are now accepting Bitcoin and other coins like ApeCoin as a form of payment. Elsewhere, Tiffany & Co is launching N-F-Tiffs, which are collectible passes that can be exchanged for custom jewelry options, and they’re just one of many brands offering some variation of this.
The luxury market: NFTs are the epitome of a controversial good, and some would call them an investment. However, because of the skepticism around them, they’re still mostly considered highly speculative. Luxury brands are also at the epicenter of discretional spending, as people don’t just buy Balenciaga because they need it. By venturing into the NFT/metaverse world, luxury brands can add a new layer to their business and offer it to a market that’s likely able to afford it already, and the upside of it potentially being an investment is just a plus.
To stay relevant: It’s also no secret that older individuals are, on average, wealthier than the young. Because of this and who can actually afford their goods, the typical luxury consumer has a pretty narrow profile. By venturing into NFTs though, they’re able to tap into a whole new audience of youth and wider income brackets that may not have typically given them a second look.

Take this related lesson on this topic and earn Dibs 🟡 while you're at it:

NFT Basics

Crypto & NFTs

7 mins

TOGETHER WITH PROPEL(X)

Propel(x) is an online investment platform that enables accredited investors to invest in technology startups and venture capital funds.

Members range from individual accredited investors writing checks as small as $5,000 to some of the largest family offices and funds writing checks of a million dollars or more.

Investors can expect to see Early Stage (Series A), Growth Stage (Series B, C), and Late stage (Series D or later) investment opportunities on the platform.

Invest in high growth potential startups alongside established VCs and other angels.

INVESTING

Defenses Against a Receding Rally

For mostly vague, unclear reasons that we can simply chalk up to the market being emotional, stocks underwent an unexpected late summer rally. Between a June 16th bottom and a mid-August top, indexes like the S&P rose 17.4% while the Nasdaq topped 23.3%.

Since then though, the S&P has subsequently dropped 7.4% again alongside the Nasdaq’s 9.2%, and even the Dow dropped 7%.

What gives? We can’t say for certain if that summer run was a relief rally, but it certainly led some to turn defensive again in an effort to protect against another falling market.

Defensive strategies

Don’t do anything: Our instinctual reactions are more catered toward preventing losses than seeking gains, so it’s natural to be inclined to sell stocks or make moves during market downturns. However, this can quickly become counterproductive and likely cause you to lose a lot of potential gains in the long term. So it’s often best to stand pat and weather the storm.
Invest in boring & quality: If you’re inclined to make some active moves during market corrections because you love the game, one of the most defensive things you can do is to buy stocks that fall into two categories: boring and high quality. Companies that fit these descriptions come with a lower beta and stronger fundamentals than those elsewhere, meaning they’re more stable during volatile times, especially in bearish markets.
Turn to income-generating assets: When it’s harder to make returns through appreciation, investors can turn to income-generating assets as an alternative. Although it takes a substantial amount of cash to make any noteworthy income here, you can create a nice supplemental cash flow with as little as $10k diversified across things like bonds and dividend stocks. Bond yields are up and they’re usually inversely related to the markets, and dividend stocks have a lower beta on average than growth-oriented businesses.

Don’t neglect the long-term though

Making active moves to counter the market’s volatility can be prudent, and even yield desirable results if things work out in your favor. However, being overly active can also come at a detriment to a portfolio if you’re not careful.

Keep your eyes on the horizon when it comes to investing, especially during choppy waters. Don’t lock in losses that don’t benefit you, make any sudden moves, or invest in things you don’t understand.

Take this related lesson on this topic and earn Dibs 🟡 while you're at it:

Create a Simple 3-Fund Portfolio

Investing Basics

6 mins

🔥 TODAY'S MOVERS & SHAKERS

Bed Bath & Beyond (-14.8%) on the news that the home goods retailer's CFO, Gustavo Arnal, committed suicide last Friday. The stock is down 50% over the last 5 trading days.
ADT (+13.9%) as the home solutions & security provider gets $1.5 billion in new investments from State Farm and $150 million from longtime investor, Alphabet's Google. Investment goals include risk mitigation for insured homeowners to lower costs for them & innovation.
Bitcoin (+0.2%) to $19,830.10 (1D)
Ethereum (+3.3%) to $1,671.07 (1D)

This commentary is as of 9:10 am PDT.

🌊 BY THE WAY

🔮 Answer: 59%. All economists agree that predicting a stock’s price is tough, but only 59% of Americans agree with that statement (Financially Simple)
💳 You’re charging me for whaaat? Four things that used to be free (WSJ)

🐻 ICYMI. The bear market trap (Finny)
🏘️ Bank of America launches zero down payment mortgages to help minorities buy their first homes — here’s who can apply (CNBC)
🪙 Finny lesson of the day. Selling at a loss is something that many of us have gotten accustomed to over the last couple of months. The good news is that the US tax code wants you to minimize your tax bill so you’re incentivized to invest. And that’s where tax-loss harvesting (TLH) comes in. 👇🏽

Tax Loss Harvesting

Taxes

7 mins

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The Gist is Finny's twice-a-week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The Gist content team: Chihee Kim, Austin Payne, Carla Olson.

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