Strategic Considerations for Investors Amid Tech Earnings and Upcoming US Election

12-07-2024

With major tech earnings approaching in the coming weeks and a US election on the horizon, investors might consider a put spread as a strategy to profit from a potential market retracement from the S&P500’s near all-time highs.

The upcoming election adds an additional layer of uncertainty to the market, as the potential for policy changes, regulatory shifts, and political volatility could result in significant market swings – as we saw during Trump’s previous term in office.

The recent surge in the market capitalisation of AI-focused tech companies like Nvidia and AMD may not be mirrored in the upcoming earnings reports of Microsoft, Google, Tesla, and Meta as they compete to keep pace with non-profit industry trailblazer OpenAI.

Nvidia, the market leader in GPU and AI software, has secured a dominant position by supplying their proprietary CUDA framework microchips to virtually all of the major tech firms including Microsoft, Google, and Meta for their AI model development.

Given their current dominant weighting in the S&P 500 index, if these tech giants fail to meet earnings and forward guidance expectation, it may trigger a market pullback presenting a profitable opportunity for a put spread strategy.

The benchmark US index is up 17.75% year to date, currently trading at 5627.94

Breakeven if underlying S&P500 index = $5346 @ Expiry 20–Dec-2024 (long put strike price – net premium paid)

Put Spread

buy 1 E-mini S&P500 20-Dec-2024 5400 Put @ 91

sell 1 E-mini S&P500 20-Dec-2024 5000 Put @ 43

buy 1 x $91.00(contract price) x 50 (contract size) = $4,550 debit

sell 1 x $43.00 (contract price) x 50 (contract size) = $2,150 credit

Trade Idea

Put Spread

S&P500 Cash Price = 5627.94 (as of 12/07/2024 @ time of writing)

Total consideration of $2,400 (excl. fees + commissions)

A retracement of ~10% to the 5000 level by 20-Dec-2024 expiry would yield a 370% return on your initial investment.

valuing the put spread at $20,000 (5400 – 5000 x 50)

yielding a maximum profit of $17,600 ($20,000 – $2,400) (excl. fees + commissions)

Maximum loss $2,400 (excl. fees + commissions)

Defined risk profile, maximum loss is equal to the net option premium paid.

Lower initial outlay in exchange for a capped maximum profit.

The contents of this article are for general information purposes only. Nothing in this article constitutes advice to any person and any investments and/or investment services referred to therein may not be suitable for all investors. If you’re unsure whether any investment is right for you, you should contact an independent financial adviser. For more information, please see Terms and Conditions | OptionsDesk.