May 2019 by Luckbox Magazine

life. money. probability.

MAY 2019

e c i f f o x Bo

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THE ISSUE WITH BIG MEDIA S TA R R I N G

Movie Studios • Streaming Services • Cable Companies

Plus: Probability of Profit • High-Yield Hijinx Sous-Vide Cooking • Metallica’s New Whiskey

Kylie inside! (to sell more magazines)

May 2019

Special Report: Big Media & Entertainment

25 No End in Sight Tentpoles in the 27 House of Mouse Movie theaters bounce back.

Disney is looking toward bigger global box office revenues.

AMC Entertainment: Time to Buy a Ticket An optimistic outlook for brick & mortar theaters.

Disney vs. Netflix: The Battle for Big Media

A clear favorite is emerging as they co-opt each otherâ&#x20AC;&#x2122;s business models.

Cable TV? Cut It Out

The Low Spark of High-Yield Stocks

Cord cutting is trending. The numbers, winners & losers.

A look at the false allure of high-dividend stocks.

luckbox | may 2019

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managing editor yesenia duran technical editor mike rechenthin features editor tom preston contributing editors vonetta logan, wolf richter creative director jacqueline cantu contributing art director cassie scroggins

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contributing producers adrienne applegate, jessica mcdermott

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editorial director jeff joseph PHOTOGRAPHS: (BLACKENED) COURTESY OF LION & LAMB COMMUNICATIONS; (JENNER) REUTERS/ANDREW KELLY

n l

editor-in-chief ed mckinley

submit a story idea tips@luckboxmagazine.com comments & critiques feedback@luckboxmagazine.com request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service service@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com luckbox magazine is published at 19 n. sangamon, chicago, IL. 60607. editorial offices: 855.468.2789 printed at Lane Press www.luckboxmagazine.com

trades actionable trading ideas

LIGHT THIS CANDLE

13 CNK: Movie Moves

trends life, luxury & the pursuit of happiness LIQUID ASSETS

44 Heavy-Metal Whiskey

THE TECHNICIAN

WELLNESS

MACRO TRADER

47 Movies About the Markets & More Reviews

14 The Simple Clarity of Trendlines

16 The Forex FAANG Trade OPTIONS

18 The Media Trade FUTURES

20 Buns Up? DO DILIGENCE

luckbox magazine

21 Media Matters

@luckboxmag

22 Highly Liquid Media Stocks

46 Sous Vide ARTS & MEDIA

THE POKER TRADE

50 Russian Illusion FINANCIAL FITNESS

52 Keto Veto

techniques essential trading strategies BASIC

55 Going Long INTERMEDIATE

57 Probability of Profit ADVANCED

62 The Short Put 64 luckbox of the month

See why this face sells so much stuff

53 Calendar

CHERRY PICKS

luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

may 2019 | luckbox

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OPEN OUTCRY

THE ISSUE WITH BIG MEDIA

eaders will find this issue of luckbox long on media. It’s filled with stats, facts, analysis, opinion and probabilities, most of it related to movies, television, cable and big media. The upshot? Even after a banner year for box office revenue in 2018, the entertainment industry continues to fret about what lies ahead for brick-andmortar movie theaters. Studios and cable providers alike are wondering whether Disney’s “tentpole” strategy will increase its already huge share of box office receipts. Netflix is producing content like mad in an effort to maintain its edge in streaming video in the face of an explosion in competition. Cord cutters and moochers are producing a chilling effect on pay TV and streaming revenues. If that’s not enough, we wrap up the issue with movie and TV rankings and reviews. Plenty of big data shows up in the pages of this issue, too. We can’t get enough numbers. We were surprised, for example, when our research indicated that 32% of Americans who went to the movies last year went once a month. We weren’t surprised, however, that the most recent Academy Award for Best Picture went to a film that ranked 85th at the box office and that fewer than 3% of American moviegoers saw it at the theater. Personally, we’d rather make a profitable film than the award-winning film, but that’s just us. Readers will find that luckbox often expresses numbers in dollars or percentages. It’s what the magazine’s all about…life, money and probabilities, particularly probabilities. To understand any investment opportunity (including stocks, marriage or movies), know the numbers and recognize the odds. So, get off your ath, let’s do some math. Tom Preston features editor

We were thrilled a month ago to put the debut issue of luckbox magazine in your hands! We were even more thrilled to receive so much feedback from readers. Please take a moment to visit luckboxmagazine.com/survey. Give it to us straight and help us choose the next luckbox of the month!

luckbox letters I purchased the print edition of the first issue of luckbox magazine and, wow, it was phenomenal. The look and feel really stood out as exceptional. The story on Tom Sosnoff was great, and Jonathan Little’s (The Poker Trade) contribution was very welcome. There are strong parallels between poker and trading – particularly selling option premium – so there’s a great synergy there. For trading content, you’re off to a good start but I’m looking forward to more challenging content for seasoned traders. I understand there’s a balancing act as you try to reach a new audience while also keeping in mind more experienced traders, like me. Perhaps a deeper and longer Advanced Techniques section is appropriate for that exploration. Keep up the great work! — Will Buelow, Minneapolis, MN

Bravo!!! What a great magazine April 2019 was. I cannot wait for more. My favorite part is the “tile” view (of the digital reader). It makes getting through all of the material very easy. I love the information. Keep it coming. — Cory Bishop Tewksbury, MA

I liked the articles about trading. Direct and to the point. Thanks guys! I’m an investment newbie but already see some things I will try out. I think I’m going to like this. — Saundra Blanchard Muskegon, MI

Jeff Joseph editorial director

Please email suggestions, criticism and comments to feedback@luckboxmagazine.com

I really enjoyed the story on Tom Sosnoff. Written well, articulate, without the need to sound Shakespearean. The honesty of the man and tastytrade was highlighted, without being boastful. So, “Well done,” to the editorial and design team at luckbox. A really good effort. Now that the benchmark has been set, you have a lot to live up to! Good Luck. — Kris Warrior Melbourne, Australia

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luckbox | may 2019

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SHORT INTEREST

Google (Alphabet) 91% share of search engine revenue Facebook 72% share of social networking site revenue Amazon 49% share of e-commerce revenue Sources: America’s Concentration Crisis (2017 data), Open Markets Institute (2019)

“CEOs in general are paid far too much. Jesus Christ himself isn’t worth 500 times his median worker’s pay.” Abigail Disney, granddaughter of Roy Disney – who founded The Walt Disney Co. with brother Walt Disney – expressed her thoughts on executive compensation to CNBC. luckbox: Don’t expect that assessment from a Disney heir to shake up the Magic Kingdom. It’s still the place where dreams come true when top managers wish upon a star. Disney CEO Bob Iger was awarded $65.6 million for his performance last fiscal year, the result of a pay bump for extending his tenure at Disney through 2021 and stock awards in excess of $35 million. General counsel Alan Braverman knocked down $10.4 million in 2018 and chief human resources officer Jayne Parker brought in $6.8 million But probabilities suggest that more “median workers” are in the crosshairs and apt to fall prey to reductions in redundancy. In March, Iger closed Disney’s $71.3 billion acquisition of 21st Century Fox’s film and TV assets (see page 30), and two days later it started layoffs that are expected to cost as many as 4,000 Fox employees their jobs.

luckbox | may 2019

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“Nearly half of all e-commerce goes through Amazon. More than 70% of all internet traffic goes through sites owned or operated by Google or Facebook.” Sen. Elizabeth Warren, D-Mass, took the lead among 2020 Presidential hopefuls in calling out the big tech companies that she says control the way Americans use the internet. In her view, the tech giants wield power in ways that punish small businesses, quash innovation and substitute their own financial interests for the broader interests of the American people. “To restore the balance of power in our democracy, to promote competition, and to ensure that the next generation of technology innovation is as vibrant as the last, it’s time to break up our biggest tech companies,” Warren maintains.

“We’re now in a second Gilded Age — ushered in by semiconductors, software and the internet — which has spawned a handful of hi-tech behemoths and a new set of barons.” Robert Reich, chancellor’s professor of public policy at the University of California at Berkeley and former secretary of labor in the Clinton administration, agrees with Warren declaring, “Bust up the monopolies.” The combined wealth of Facebook’s Mark Zuckerberg ($62.3 billion), Amazon’s Jeff Bezos ($131 billion), Google’s Sergey Brin ($49.8 billion) and Google’s Larry Page ($50.8 billion) has grown larger than the combined wealth of the bottom half of the American population, he says.

luckbox: A trend is emerging – governmental agencies here and abroad are taking action against monopoly power. European regulators recently hit Alphabet’s Google with its third antitrust fine in two years for “illegal practices in search advertising brokering to cement its dominant market position.” That brings the two-year total of EU fines assessed against Google to more than $9 billion. Meanwhile, the Federal Trade Commission has created the Technology Task Force with a mandate to bring sharper focus to antitrust issues with respect to big tech. In much the way that Republicans and Democrats came together last year to enact landmark criminal justice sentencing reform (The First Step Act), luckbox foresees an increased probability that bipartisan political forces will begin to turn up the heat on Facebook, Amazon and Google before the 2020 elections. We like this trend. luckbox values free and fair markets.

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may 2019 | luckbox

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FAKE FINANCIAL NEWS

Influencers: The New Pump & Dump Cons

hen 50 wealthy parents from eight states were indicted for allegedly using a Brinks truck full of bribes to get their shockingly average spawn into the nation’s elite universities (and the University of San Diego), the Twittersphere was awash in jokes. “Aunt Becky’s going to jail,” some online comedians wrote. “Man, these housewives sure are desperate,” wrote others. What got lost in the shuffle, however, was how federal authorities caught on to the biggest college-admissions scam ever. According to the Wall Street Journal, “Morrie Tobin, a Los Angeles financial executive who was being investigated in….an alleged pumpand-dump investment scheme... offered a tip to federal authorities in an effort to obtain leniency.” Ah, pump-and-dump. It could be the tagline of dating apps like Tinder and Bumble, but it’s a scam as old as time: boy meets stock, boy “hypes stock” by endorsing it and getting others to invest, boy sells stock at higher price, boy never calls stock again. It’s essentially a financial ghosting. It seems Tobin didn’t like being the object of a shakedown by a Yale women’s soccer coach, so he sang like a canary to the Feds. (Tobin’s no financial savant, by the way, having tried to sell pharma stock by not registering it.) Anyway, the admissions scandal has once again focused the financial spotlight on pump-anddump schemes. And there’s no better topic for luckbox fake financial news than an oldie but goodie scam.

Oprah Winfrey

DJ Khaled

Floyd Mayweather

“On (messaging apps) Telegram and Discord, 10% of the pumps increased the price by more than 18% and 12% respectively in just five minutes. Given that trading volume and crypto prices were falling during the January-July 2018 period, even modest percentage increases were considered ‘an achievement for the pump.’” – The Economics of Cryptocurrency Pump and Dump Schemes (2018)

PHOTOGRAPHS: (WINFREY) REUTERS/LUCY NICHOLSON; (KHALED) REUTERS/STEVE MARCUS; (MAYWEATHER) REUTERS/ISSEI KATO

By Vonetta Logan

luckbox | may 2019

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Con game goes digital Today, a pump-and-dump scheme reaches victims through an Instagram feed instead of in the leather-ensconced locker room of the Good Ol’ Boys Club. Gone are the days of charlatans, confidence men and traveling purveyors of snake-oil. Welcome to the era of the influencer. A blonde in a teeny bikini posting #fitspiration advice while hawking #flatbellytea quickly makes more money than most people see in a lifetime. Imagine her commanding her manservant, Timba, to read an article like this aloud whilst spraying her with sunless tanner. The digital age is perfect for digital manipulation. On average, at least two pump-and-dump schemes occur every day, generating $7 million in daily trading volume, according to a study at Imperial College London of 236 pump-and-dump schemes in the crypto space. Bloomberg News cited another study, “The Economics of Cryptocurrency Pump and Dump Schemes,” by researchers at the University of Tulsa, University of New Mexico, and Tel Aviv University, that “identified 4,818 so-called pump-and-dump attempts between January and July.” Researchers called the fraud “widespread and often quite profitable,” Bloomberg said. Trading on fame How about a legendary boxer and a DJ known for pumping up the jams becoming embroiled in a tussle with the Securities and Exchange Commission over an Initial Coin Offering (ICO) pump-and-dump imbroglio? In November 2018, Deeeeee JAAAAAAY Khaled (sorry there’s no way to write that without having his voice in your head), and retired professional pugilist Floyd Mayweather settled out of court with the SEC but racked up a combined $767,520 in fines for failing to disclose the payments they received for promoting ICOs on their social media channels. The case centered

on a cryptocurrency platform called Centra. According to Forbes magazine, “Centra promised investors that funds raised in the ICO would be used to build...a debit card backed by Visa and Mastercard that would enable users to convert thinly traded cryptocurrencies into U.S. dollars.” The card was a scam, but Mayweather and Khaled weren’t charged with fraud. They were accused of “failing to disclose the fact that they were paid to promote Centra’s ICO.” So two multimillionaires get a slap on the wrist and then go about their day while investors get fleeced. Even more ludicrous, stock shenanigans are now working in reverse on the new digital pump-anddump frontier. Yes, child, let luckbox introduce you to an epic pump-anddump scheme. Kylie Jenner, the world’s youngest self-made billionaire is known for inflating her lips while deflating stock prices. In February 2018, Jenner tweeted, “Sooo does anyone else not open Snapchat anymore? Or is it just me….ugh this is so sad.” Then, faster than the Kardashian clan can flock to a camera, Snapchat’s stock (SNAP) lost $1.3 billion in market value. From there, it continued to decline. Jenner tried to ameliorate the situation by tweeting, “Still love you tho snap….my first love.” A year later, Snap shares were still down 50% from BK…before Kylie.(For more on Jenner, see page 64.) The celeb puffery doesn’t end there. In 2015, billionaire media mogul and boss of housewives everywhere, Oprah Winfrey, joined the board of Weight Watchers (WTW) and took a 10% stake in the company, causing the stock price to double in a single day. Subscribers got Winfrey’s cauliflower pizza! Her ability to recruit subscribers powered Weight Watcher’s stock to a record high of more than $100 per share in July 2018. But since those magical days, Winfrey hasn’t been, ahem, pulling her weight. WTW is down

SNAP 1905-fakenews.indd 11

about 80%, and Winfrey unloaded some of her shares before the stock started to trim the fat.

On average, at least two pump-and-dump schemes occur every day, generating

The power of influence In this day and age, influence is its own currency and it’s trading at all-time highs. According to an article in Wired magazine, “becoming a social media star is the fourth most popular career aspiration for Gen Z, ranking well above actor or pop star.” Mama don’t let your kids grow up to be cowboys….er, YouTubers. The American lexicon now includes the words “influencers,” “micro-influencers” and “pet-influencers.” People are taking notice everywhere, from college campuses to local juice bars. Nothing happens by accident anymore, and nothing’s organic. A December article in Fast Company says, “The Casper mattress. The Allbirds sneaker. Birchbox, Prose, Snowe, and Keeps... each of these brands’ Instagram feeds were designed by the same company – the New York-based studio Red Antler.” If that’s not enough to blow your mind, the Fast Company writer continues, “Red Antler partners with companies in their earliest days of forming their business and frequently takes equity in those businesses.” Put your hands together for the new digital pimp, ladies and gents! luckbox asserts that speculative assets like crypto, cannabis or ICOs – while heady with roller coaster price movements and celebrity endorsements – are no place for active and engaged investors. Trading mechanically in viable, listed, liquid underlyings provides the true path to wealth, no matter what a blonde in a teeny bikini tries to tell you.

7 million

in daily trading volume.

WTW

Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

may 2019 | luckbox

3/29/19 1:54 PM

Free your mind.

All this from the think tank that brings you free live trading every minute the markets are open!

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trades actionable trading ideas

LIGHT THIS CANDLE

Candlestick chart analysis for intermediate-term trading

CNK: Movie Moves By Doug Busch

inemark Holdings (CNK) is up 14% year-to-date and 4% during the last one-year period. Already sporting an attractive dividend yield of 3.3%, Cinemark is looking to extend its winning streak to its longest in 13 months. While this stock has had issues just above $40 since 2015, a decisive break could see a powerful move all the way up to $53.

Cinemark Holdings (CNK)

Douglas Busch, CMT, trades U.S. equities using technical analysis with an emphasis on Japanese candlesticks. @chartsmarter

CNK BUY STOP: Above $42

Source: ChartSmarter

may 2019 | luckbox

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trades

THE TECHNICIAN

A veteran trader tackles technicals

The Simple Clarity of Trendlines By Tim Knight

echnicians draw basic but powerful trendlines on charts to help them understand areas of support, resistance and change. In financial graphs, trendlines can provide perspective on likely price behavior, usually by emphasizing important price levels. They’re the most basic charting tool, but a solid knowledge of using and interpreting them can prove essential to success as a technical analyst. Here are some properties of a well-drawn trendline: • During the time it’s intact, the trendline connects at least two points of a graph (with high points or low points), and the more points it touches (without the price bars going above or below the line), the more valid and useful the line. • It is, during that time, never violated by prices between the starting and ending points; in other words, all of the prices fall either below the trendline (in which case the line is resistance) or above the trendline (in which case the line is support). A trendline’s purpose depends on the user’s relationship with a particular security. If an investor has a position in a stock, the trendline ensures that the trend of the stock is intact so that when the trend is violated the investor can exit the position as profitably as possible. If an investor doesn’t have a position in the stock, the purpose of a trendline is to show when a possible trend change has taken place so that the observer can consider taking a position in the stock based on that trend change. (The term “stock” is used broadly here and can refer to any financial instrument or its derivative). Drawing a trendline seems simple because laying down a straight line to “bound” the uptrend or downtrend of a stock makes intuitive sense. The artfulness, however, is in discerning when to redraw or reposition a trendline. As a stock moves, it may become appropriate to redraw a trendline to take into account the more complete price data. The danger is that an investor can wind up fooling himself. If trend-

DIS 14

Disney trends With this bullish stock, one can draw four trendlines on the top chart. In a shorter timeframe (bottom chart), trendlines can help monitor the shorter-term health of an instrument.

The artfulness is in discerning when to redraw or reposition a trendline

luckbox | may 2019

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trades

lines become so elastic that they bend and move no matter what direction prices are heading, then their value is eliminated. The trendlines of two major entertainment stocks can provide some insight. One’s bullish, and another bearish. Starting with the bullish stock, Disney (DIS), a technician can draw four trendlines on top of it. See “Disney trends,” left. The green and red trendlines constitute an ascending channel. Separately, each is a trendline in its own right. But taken together, because they’re parallel, they are a price channel bounding the daily bars for many years of the stock’s price. As long as the price doesn’t break beneath the lower trendline, this uptrend can be considered solidly intact. A closer look at the recent history of DIS illustrates how, in a shorter timeframe, trendlines can help to monitor the shorter-term health of an instrument. The lower line, in green, is the supporting trendline, and just as with the much longerterm trendline, it has never been violated. The horizontal line, in blue, constitutes resistance as of this writing. If and when it manages to push above this blue horizontal, the role of that line will change from resistance to support. These simple lines help affirm the underlying support of the stock and its potential for further price gains, should it break above its resistance level. The notion of “violating” a trendline is important. A trendline provides a line that prices should stay above (if the line is support) or below (if resistance). If prices stray across the trendline, something has changed. Deviating from the lines doesn’t necessarily signal a change, but the trader better start paying closer attention. In the case of the DISH Network (DISH), price has definitely crossed under the green supporting trendline. The uptrend has, by definition, been broken. (See “Dish support breaks,” right.) A closer examination of the chart shows the breakdown in more detail. The long red and blue lines defined the reversal pattern as the stock peaked at about $80 and lost half its value. In spite of that tremendous loss, the actual uptrend failure hadn’t occurred yet. That took place only when the price broke beneath the green trendline. Notice how, once prices have violated the trendline they tried to go above it again but are repeatedly repelled. That illustrates the “role change”

DISH support breaks In the top chart, the prices crossing below the green supporting trendline illustrate that the uptrend has been broken. The second chart provides a closer look, where the long red and blue lines defined the reversal pattern as the stock peaked at about $80 and lost half its value.

DISH that has occurred. Just because the trendline is broken doesn’t mean a financial instrument is headed for a major change, but it often means that the chart is no longer in the defined uptrend. Paradoxically, stocks that break their uptrends can still move higher in price, and stocks that break downtrends can still move lower. A violated trendline, however, is one of the simplest warning signals investors can monitor.

The old saying, “the trend is your friend” has been true ever since charts were invented. In spite of how sophisticated some technical indicators have become, the most minimal of studies — a simple, straight line — can be the most faithful ally. Tim Knight has been using technical analysis to trade the markets for 30 years. He founded Prophet Financial Systems and offers free access to his charting platform at slopecharts.com.

may 2019 | luckbox

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trades

MACRO TRADER

Intraday declines on tech giants can indicate a short dollar-to-yen trading opportunity

The Forex FAANG Trade By Amelia Bourdeau

AANG stands for a collection of popular tech and communication companies that have changed the way most people live. The acronym comes from Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG). These companies, with the exception of Netflix, rank among the Top 10 most-valuable publicly traded companies in the world. Apple, Amazon and Microsoft, which is not a FAANG member, have recently rotated in and out of the No. 1 spot. In August 2018, Apple became the first U.S. company with a $1 trillion valuation and the world’s most valuable publicly traded company. On Dec. 3, 2018, Amazon surpassed both Apple and Microsoft for the title before yielding it back to Microsoft. Because of their popularity and market capitalizations, FAANG stocks can individ-

ually or collectively set the trading-day tone for U.S. equity indexes. Take the example of March 18, 2018, when news of Facebook’s Cambridge Analytica scandal led equity markets lower. The same thing happened with Apple’s Nov. 1, 2018 announcement of a disappointing holiday season forecast and news that it would stop reporting how many iPhones it sells. This is where macro trading comes into play. Moves lower in U.S. equity markets can affect safe-haven currencies – the U.S. dollar (USD), Swiss franc (CHF) and Japanese yen (JPY). Safe-haven currencies tend to strengthen in times of risk-off sentiment. Looking at the charts, USD/JPY has responded to intraday moves lower in FAANG stocks. The safe-haven JPY can appreciate versus USD when FAANG stocks fall intraday.

Any of the FAANG companies can set the tradingday tone for U.S. equity indexes

Horse race Apple, Microsoft and Amazon jockey for the top spot in market capitalization.

Source: Bloomberg LLP

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trades

In a recent example of this phenomenon, Facebook shares fell 2.46% on March 15, 2019, as Facebook announced leadership changes caused by a shift in strategy. USD/JPY moved lower as well – in other words, JPY strengthened versus USD. (See “In unison,” below.) On Dec. 4, 2018, Apple shares fell approximately 4.4% as market participants fretted about iPhone sales. USD/JPY moved lower as well – meaning that JPY strengthened versus USD. (See “Twins,” right.) Notice that toward the end of the New York trading day session on the chart – selling seems to accelerate for Apple into the close, but USD/JPY stalls, trading mostly sideways. That’s because FX trading usually slows ahead of Asia open, as liquidity is lower until Singapore starts its trading day. When a FAANG stock is down heavily at the trading session open, investors should monitor USD/JPY intraday price action for opportunities to short USD/JPY.

Twins Apple and the USD/JPY safe-haven currencies stuck together like glue on Dec. 4, 2018.

Amelia Bourdeau is CEO at marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors at every level. @ameliabourdeau

Source: Bloomberg LLP

In unison Facebook and the USD/JPY safe-haven currencies rose and declined together on March 15 of this year.

When a FAANG stock is down heavily at the trading session open, monitor USD/JPY intraday price action for opportunities to short USD/JPY

Source: Bloomberg LLP

may 2019 | luckbox

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trades

OPTIONS

Smaller investors can create a diversified portfolio if they know their options

The Media Trade By Ryan Shaw

t least some of the readers who’ve digested the articles on media in this issue of luckbox may have identified trades in that sector with attractive probabilities. If so, they may now be wondering how to use those probabilities in their favor. The answer might be options. Options aren’t just for investors with large accounts. With a smaller account it’s difficult to buy or short enough stocks to create a portfolio that maximizes exposure across asset classes. Single name equities are some of the most attractive trading vehicles and narratives, but trading stocks in a capital-efficient way can prove difficult. Using options trades, investors can simulate stock positions while using about 10% of the capital. That’s one of the advantages options have for traders with modestsized accounts. Many brokers offer 4x leverage intraday and 2x leverage overnight for stock trading, but even that requires a large amount of capital to avoid getting churned up by commissions margin rates – not to mention being limited to only a handful of positions at a time. Sure, one can buy cheap out-of-the-money options, but that’s a world of low-probability trades requiring large moves and perfect timing. Using a $25,000 account as an example, and spreading capital over four media sectors, an investor could go long Disney (DIS) and Imax (IMAX), and short Netflix (NFLX) and Comcast (CMCSA). Assuming an even allocation of the entire account across those equities, a best-case return assuming a 1-month expected move in a favorable direction in each stock (see “$25,000 in stocks,” right). In this case, with 100% of $25,000 in capital at use, there is a probable range of return up to 9%. Using options can significantly increase that return while maintaining a similar probability of profit. Using options, we’ll create strategies with a similar delta as the stock positions in the example above, and cover four trade ideas

$25,000 in stocks... With 100% of capital at use, the exposure is approximately 9% in one month. Options can achieve similar results using less capital. Stock

Capital

1-Month Expected Move

Total Return

NFLX

$6,250

11%

$687.50

DIS

$6,250

$343.75

CMCSA

$6,250

$350.00

IMAX Totals

$6,250

$493.75

$25,000

$1,875.00

Put on Netflix While put spreads are typically long volatility plays, this trade is actually a theta positive trade with a higher than 50% probability of profit and no extrinsic premium.

using different strategies for the aforementioned media stocks. Netflix, which has a relatively low IV rank in the 30s, skewed higher by earnings before April expiration. Using a long deep in-themoney put to simulate short stock, one can sell a far out-of-the-money put to completely offset the extrinsic premium of the in-themoney put. Specifically, an investor could buy the 370-345 May put spread for $12.17, which

Using capital efficiently helps traders manage smaller accounts

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has no extrinsic premium with the stock trading around 356. While put spreads are typically long volatility plays, this trade is actually theta positive with a higher than 50% probability of profit and no extrinsic premium. With earnings and the elevated IV, this provides a trader a bit of a hedge against significant volatility movement in either direction, which a short stock lacks. (See “Put on Netflix,” left.) Disney’s IV rank is also relatively low at around 24%, but in a low-volatility market that offers both a short or long volatility opportunity. Selling the April 120 call and buying the May 120 call creates a long call calendar spread, playing for a gradual return to the highs. This trades at a $0.75 debit, with over half the May call price offset by selling the April call. This is an extremely low capital play for a $115 stock. While calendar spreads are technically long vega plays, a call calendar could be considered somewhat short volatility, assuming a rise in the stock price will coincide with lower volatility in the April call and a stable volatility in the May call. With an IV rank of 24%, a calendar spread provides a nice option because a significant decrease in price and increase in volatility won’t hurt as much as selling naked options, and lower volatility will likely be offset by the stock’s movement in our favor. A trader would need to buy around 15 of these spreads to equal a similar delta to 100 shares of stock. (See, “Disney has the options,” top right.) Comcast offers an IV rank of almost 0%, which allows a trader to buy in-the-money puts with almost 0 extrinsic value. For instance, the 45 June put has $0.13 of extrinsic premium, giving us nearly an identical profit and loss exposure to short stock. However, the put can be bought for just under $600, as opposed to around $4,000 to short the stock. Buying June locks in the super-low IV rank for a longer time, and enables a trader to sell out-themoney puts in April or May as either the stock moves against/for the position, or any subsequent uptick in volatility. IMAX has an IV rank of around 6%, favoring buying volatility. To simulate long stock, one can buy the June 20 call for $4.05, containing around $0.70 of extrinsic premium. Here, a trader could sell the April 25 call for $.30, and assuming one could sell a similar call in May in the future, there would be theoretically mini-

Disney has the options With an IV rank of 24%, a calendar spread is a nice option in that a significant decrease in price and increase in volatility won’t hurt as much as selling naked options, and lower volatility will likely be offset by the stocks movement in our favor.

... or, $3,282 in options These strategies will set a trader back around $3,200, using a little more than 10% of the accounts capital and leaving room for many more trades/positions. Stock

Capital

NFLX

$1,217

11%

$665.72

DIS

$1,125

$282.25

25%

$570

$215.44

38%

CMCSA IMAX Totals

1-Month Expected Move

Total Return

Total Return on Capital 55%

$370

$151.50

41%

$3,282

$1,314.91

40%

mal extrinsic value being paid for this trade. In total, these strategies will set a trader back around $3,200, using a little more than 10% of the account’s capital and leaving room for more trades or positions. Each play uses the leverage options, so note that this elevates the potential gains and losses. However, the idea is to demonstrate options strategies with higher return on capital, while maintaining the 50-50-probability shorting/buying stock provides. Assuming the same move in a trader’s favor as before (and no change in back month volatility) return for the capital deployed increases significantly. “... or, $3,282 in options,” above, shows the return of these options plays versus their stock counterparts, again assuming expected

one-month moves in favor of each position. All four strategies come with their own benefits and drawbacks, but each provide a higher probability play than buying cheap out-the-money options and hoping for a large move in your direction. Each also allows different plays on contracting and expanding volatility, breaking out from the rut of 50-50 straight up bets on stock movement. Using capital efficiently is critical to traders with smaller accounts, and these options strategies offer a creative alternative, using leverage and optimizing probabilities. Ryan Shaw, a futures and derivatives trader, specializes in option spreads and pairs trading at NinjaTrader, analyzing order execution, charting and automated strategies.

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FUTURES

A veteran futures trader’s take on the markets

Buns Up? By Pete Mulmat

n Fridays, the Ceres Cafe at the Chicago Board of Trade squeezes about five inches of fish between two slim hamburger buns. The fish gets a lot of attention, but nobody cares too much about buns. The wheat that’s used to make the buns doesn’t command much respect, either. Wheat futures fell on March 11 to log their lowest finish since January 2018. The most-active May futures contract had been heavily sold for several weeks. Slow export concerns were confirmed on the U.S. Department of Agriculture’s World Agriculture Supply and Demand Estimates report issued Friday, March 8. The report also showed slowing domestic use as well. Ceres must be onto something. Competition from abroad Prices are under attack due to foreign competition, which is hurting U.S. farmers’ ability to sell grain abroad. Normally, a third of American wheat is sold to foreign buyers, but exports have been slow this year, bottling up grain. The biggest competition comes from Russia, Ukraine and other former Soviet Union nations; whose wheat has been consistently cheaper than U.S. wheat, forcing American farmers to sell at increasingly lower prices. Flooding along the Mississippi River, a waterway that plays a crucial role in the shipment of corn, soybeans and wheat from the Midwest to ports along the Gulf of Mexico, has disrupted barge traffic and could heighten volatility in agricultural markets. Reverse skew Seasonally, a pick-up in wheat volatility begins as the crop emerges from the ground. Wheat usually has a “reverse skew” where equidistant calls are more expensive than puts. At depressed prices, the skew becomes nearly flat, with calls trading relatively cheaply and puts trading relatively rich. With wheat down 26% from its highs last year, a contrarian play (a long bias) may be

interesting. Realized volatility is the highest it’s been in these markets all year, and it’s still rising. For the next 60 to 90 days, wheat may provide higher volatility and expanded ranges to trade. Plus, agricultural markets have almost no correlation with the equities markets, making trades in wheat a potentially complimentary uncorrelated trade to a core portfolio. With / ZW option skew the way it is and a higher volatility overall, a bullish wheat trade could be a short out-of-the-money put in the June expiration. In the meantime, it’s almost Friday… Where’s my fish sammich? Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the main flagship programming slot called Splash Into Futures.

Grains of truth Approximately 75% of all U.S. grain products are made from wheat flour. A bushel of wheat makes about 90, 1-pound loaves of whole wheat bread. The average American consumes about 134 pounds of wheat flour per year. Source: USDA

Soft red winter wheat For soft red winter (SRW) wheat called /ZW, volatility is increasing. Wheat generally has a reverse skew.

Volatile wheat Realized volatility is the highest it’s been in these markets all year, and it’s still rising. As of 5/15/18

Realized Volatility

RV Rank

Soybeans (SOYB)

18%

48%

Wheat (WEAT)

27%

47%

Corn (CORN)

19%

48%

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DO DILIGENCE

Emerging financial technology helps investors understand their portfolios

Media Matters By James Blakeway

etflix (NFLX) and Spotify (SPOT) are making aggressive bids for the public’s eyes, ears and expendable income, forcing the entertainment industry titans of yesteryear to innovate, or acquire innovation, in their struggles to stay relevant and profitable. The threat of takeovers in the video entertainment industry and the uncertainty of licensing deals are keeping prudent investors glued to screens or printed pages to monitor the industry’s news. The headlines include the Disney+ (DIS) video streaming service’s attempt to poach Netflix subscribers. Disney hopes to become the new home for its own content and would remove it from other services as the licenses expire. That would put programming pressure not only on Netflix but also on other services such as Starz (STRZA) and TNT, which is related to WarnerMedia (TWX). Music entertainment is a whole different animal, pitting Spotify head-to-head with Apple (AAPL) and Amazon (AMZN) music. While video producers are differentiated because they don’t have the same TV series or the same movies, firms that stream music have similar libraries. That means that technology

65: On Track

Top publicly traded entertainment companies An equally weighted portfolio of these stocks, initiated when Spotify offered its IPO last year, outpaced the S&P 500 during the same period. Company

Symbol

Market Cap ($ Billions)

Return from 4/3/18 to 3/13/19

Comcast

CMCSA

174.2

18.2%

Disney

DIS

169.9

14.8%

Netflix

NFLX

154.4

27.3%

Twenty First Century Fox

FOX

93.3

43.5%

SiriusXM

SIRI

28.3

-1.1%

Spotify

SPOT

25.3

-3.7%

CBS

Dish Network Corporation DISH

18.3

-7.9%

15.0

-16.0%

Cinemark Holdings

CNK

4.5

4.5%

AMC Networks

AMCX

3.5

14.6%

and pricing dictate which music providers prevail. The video entertainment industry is rife with mergers and acquisitions. It’s tough for investors to pick a single horse to bet on, and it’s unlikely that any one of these companies will continue to outpace all others. However, it’s possible that all these stocks have a role to play in a portfolio focused on consumer discretionary spending and the entertainment sector. An equally weighted portfolio of these stocks, initiated when Spotify offered its initial public offering last year, has returned 9.6%, compared with the S&P 500, which has returned 6.4% in the same time period. (See “Top publicly traded entertainment companies,” above.) To highlight the strengths and weaknesses

of a sector-specific portfolio like this, investors can run an analysis through the free Quiet Foundation (QF) Exploratory Portfolio Intelligence (EPI) system. That can provide a deeper look at the stocks’ relationships to one another and the overall market. As an example, running these 10 stocks (equally weighted) through the EPI analysis results in a score of 66 (out of 100) and a QF rating of “On Track,” the second highest rating. In the EPI report the QF takes a deeper look at the diversification, which received a poorer score because of a high correlation among these stocks. They tend to move in the same direction day-to-day. This analysis also provides insight into future potential movement of this portfolio over the next year. (Continued on pg. 23)

Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report is based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.

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CHERRY PICKS

Ripe & juicy trade ideas

Highly Liquid Media Stocks By Michael Rechenthin

echnology, evolution and acquisitions are rearranging the geography of American media companies. Let’s catch up with the some of the changes by examining the numbers for market capitalization, profits and number of employees. Sorted by market capitalization, three

companies stand out – Comcast (CMCSA), Disney (DIS) and Netflix (NFLX). All have market capitalization of more than $160 billion. But market cap doesn’t tell the whole story of those companies. Disney rakes in four times as much revenue as Netflix and employs 28 times as many workers.

Meanwhile, Comcast is pulling down annual revenue of nearly $100 billion. Netflix and Spotify (SPOT) have both nearly doubled revenue over three years – but Netflix is profitable and Spotify has yet to turn a profit. That makes Spotify a more speculative trade – management still has yet to figure out a struc-

By the numbers Investors can get to know companies by comparing market cap, profits and number of employees.

Price

Market Capitalization (in billions)

Reported Employee Count

2018

2017

2016

2018

2017

2016

Second largest cable TV company and largest internet provider

39.63

179.55

160,000

94.5

80.7

yes

DIS

Diversified multinational mass media and entertainment. Owns ESPN.

108.5

162.08

201,000

59.4

55.1

55.6

yes

NFLX

Has 139 million paid members in 190 countries.

365

159.77

7,100

15.8

11.7

8.8

yes

Company

Symbol

Comcast

CMCSA

Disney Netflix

Total Revenue (in billions)

Profitable?

Fox Corp.

FOX

Legal successor of 21st Century Fox.

37.35

70.76

22,400

30.4

28.5

27.3

yes

SiriusXM

SIRI

Provides satellite radio services in the U.S.

5.85

25.21

2,700

5.8

5.4

yes

Spotify

SPOT

Provides music streaming services worldwide

138.5

25.13

3,700

5.3

4.1

CBS

Commercial broadcast television and radio

45.35

16.94

32,700

14.5

13.7

13.2

yes

Dish Network Corp.

DISH

Has 12.3 million pay-tv subscribers. Provides access to moves and tv.

31.5

14.72

16,000

Upcoming

14.4

15.2

Upcoming

yes

Discovery

DISCA

Owns Discovery channel, Animal Planet, HGTV, etc.

26.75

14.00

9,000

10.6

6.9

6.5

yes

Grupo Televisa

Largest hispanic mass media company

10.6

6.00

39,000

Upcoming

4.9

Upcoming

yes

Cinemark Holdings

CNK

Motion picture business -- operates 341 theatres.

39.96

4.68

11,600

Upcoming

2.9

yes

Tribune Media

TRCO

Owns 39 tv station across the U.S.

4.00

5,800

Upcoming

1.9

Upcoming

yes

Sinclair Broadcast Group

SBGI

Largest tv operator by number of channels. Has 193 stations

37.8

3.50

9,000

3.1

2.7

yes

AMC Networks

AMCX

Owns AMC, WE TV, BBC America, Sundance TV, etc.

56.6

3.19

4,400

2.8

yes

Tegna

TGNA

Owns 47 television stations

13.9

3.00

5,300

Upcoming

1.9

Upcoming

yes

MSG Networks

MSGN

Primarily a sports channel.

22.05

2.00

180

0.7

yes

The E W Scripps

SSP

Currently owns 51 TV stations.

21.65

1.50

4,000

Upcoming

0.9

Upcoming

yes

Nexstar Media Group

NXST

Second largest tv station owner. Owns 171 stations.

105

0.50

3,800

2.8

2.4

1.1

yes

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ture that works. Investors might want to avoid Spotify because there’s too much uncertainty. Lastly, what stocks have liquid option markets? Options, particularly sold short, can provide more opportunity for investors because they can theoretically get the direction wrong and still make money on the credit received. In the list to the right, investors would do well to stick with the “highly liquid” stocks – Netflix, Spotify, Discovery Communications (DISCA), Sirius XM Holdings (SIRI), Disney and Comcast. Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.

MEDIA TRADE IDEAS USING OPTIONS: Bearish NFLX (1:1) Short the first out-ofthe-money call and long the 2nd out-ofthe-money call. 50% probability of profit

Bullish DISCA Short the first out-ofthe-money put, which will be below the market. With the credit received, a higher probability of success. The credit + maximum profit potential

DO DILIGENCE

(Continued from pg. 21) These stocks have a higher probability than the S&P 500 of a 10% move in that time frame. The EPI output highlights the liquidity and potential opportunity of these stock holdings. All of the companies, other than AMC Networks (AMCX), trade more than 1 million shares per day, a common threshold for a liquid stock. Liquidity is important in such a dynamic sector because it enables investors to reallocate capital quickly as the industry shifts. The opportunity metric refers to the portfolio’s prospects to use options positions against the stock holdings. Of these companies, most have exchange-listed options, with Comcast (CMCSA), Disney, Netflix and CBS (CBS) standing out as the more liquid contenders. In “Entertainment-related ETFs,” right, the projected dividend yield on this portfolio is approximately 1.1%. This is comparable to the various consumer discretionary ETFs available in the marketplace. Overall, the audio and video entertainment industry provides a blend of older, dividend

Liquid refreshment Stick with the highly liquid stocks. Symbol

Liquidity Level

Volatility Level As Compared to the S&P 500

NFLX

Highly Liquid

Very High

SPOT

Highly Liquid

High

DISCA

Highly Liquid

High

SIRI

Highly Liquid

Moderate

DIS

Highly Liquid

Moderate

CMCSA

Highly Liquid

Moderate

DISH

Moderately Liquid

High

SBGI

Moderately Liquid

High

AMCX

Moderately Liquid

High

TGNA

Moderately Liquid

High

CNK

Moderately Liquid

High

NXST

Moderately Liquid

High

CBS

Moderately Liquid

Moderate

SSP

Slightly Liquid

High

MSGN

Slightly Liquid

High

Slightly Liquid

High

FOX

Slightly Liquid

High

TRCO

Slightly Liquid

Same

To sign up for free cherry picks and daily market insights, visit tastytrade.

Entertainment-related ETFs The projected dividend yield on this portfolio is approximately 1.1%, which is comparable to various other consumer-discretionary ETFs. Name

Symbol

Yield

Return from 4/3/18 to 3/13/19

Options?

Invesco Dynamic Media ETF

PBS

0.81%

15.7%

iShares Evolved US Media & Entertainment ETF

IEME

N/A

11.5%

Vanguard Communication Services ETF

VOX

2.5%

4.2%

SPDR Consumer Discretionary Select Sector Fund

XLY

1.2%

12.0%

Yes

paying stocks with newer, tech and growth-focused companies. To wade into this sector, investors should be as nimble as these corporations moving forward. Whether using ETFs or individual stocks, wise investors may look to keep the QF EPI system in their arsenal, aiding in portfolio allocation analysis. James Blakeway is CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment advisory service for self-directed investors.

These stocks have a higher probability than the S&P 500 of a 10% move

Look under your own hood with QF

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luckbox looks at

Big Media & Entertainment 24

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Wolf Richter’s assessment of the movie industry’s traditional theater distribution system opens this luckbox look at the media and entertainment business. Last year’s surge in movie box office revenues contradicted the conventional wisdom of media mavens and analysts who predicted that over-thetop streaming services like Netflix (NFLX) and Prime Video by Amazon (AMZN) would take a slice out of movie house ticket sales. That‘s not what has happened. In fact, Ernst & Young’s Quantitative Economics and Statistics team released data earlier this year suggesting that streaming services’ best customers are the same people who spend the most time in movie theaters. But 2018’s healthy box office results mask the industry’s ominous turf wars. Traditional media are under attack by technology and social sharing platforms. Meanwhile, the battle between distributors and content creators is forcing market consolidation, mergers and acquisitions. Big media companies are doing battle in a highstakes turf war that’s likely to produce big winners. In this special section, luckbox assess the probabilities of the front runners.

In Big Media & Entertainment: No End in Sight: Movie Theaters Bounce Back p. 25 Tentpoles in the House of Mouse p. 27 AMC Entertainment: Time to Buy a Ticket p. 28 Disney vs. Netflix: The Battle for Big Media p.30 Cable TV? Cut It Out p. 37

No End in Sight

Movie Theaters Bounce Back By Wolf Richter

ovie tickets are expensive, and alternatives are plentiful, convenient and cheap. But the year 2018 became a banner year for the American movie theater industry just the same, with the number of movie tickets sold increasing 9.8% from the year before to 1.35 billion tickets, according to movie data provider The Numbers. That represented the largest increase in the number of tickets sold since 1996, and It felt like a glorious triumph for the industry. Still, ticket sales a year earlier, in 2017, had been the worst since 1995. And that 9.8% bump in 2018, relative to the previous year’s anemic ticket sales, failed to bring the industry back to 2012 levels. Sales remained 15% below 2002 and still fell short of 1997. In terms of per-capita ticket sales, the industry sold 5.4 tickets per person during the record-breaking year 2002, when the U.S. population was 288 million. By 2018, when population reached 327 million, per-capita sales had declined 24% to 4.1 tickets. That’s the brick-andmortar meltdown for the movie theater industry, which is losing out to digital competition. When it comes to dollar sales, the

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Big Media & Entertainment Movies, by the numbers

Buy Me a Ticket

Average ticket prices are in red, and ticket revenue is in black.

By 2018, per-capita sales had declined 24% to 4.1 tickets.

Movie Ticket Dollars

Movie Theater Tickets Sold in the U.S., per Year

industry introduced a truly novel concept in 2018, one it hadn’t tried in at least 22 years: Theaters didn’t increase the average ticket price! Maybe someone finally figured out that if you keep jacking up prices, sooner or later people will switch even more rapidly to digital alternatives. The average ticket price remained at $8.97. A Matter of Geography Depending upon where people go to the movies, results vary. For example, a typical movie at an AMC theater in San Francisco might set a moviegoer back about $14 a ticket. But members benefit from “$5 Ticket Tuesdays” and other discounts. In other parts of the country, movies offer a much better deal even without discounts. If a family of four goes to the

movies and pays the average ticket price, it cost roughly $36, not including the transportation and snacks. Compare that with the nominal cost of watching digitally via any one of numerous platforms on a laptop or big-screen TV at home. Despite that price differential, the industry could take solace in one fact. With last year’s 9.8% increase in the number of tickets sold, compared with the previous year, flat ticket prices resulted in a 9.8% rise in revenue to an all-time record of $12.1 billion. Even though the number of tickets sold in 2018 was down 15% from 2002, dollar sales were up 32%. That’s because the average ticket price had soared 54%, from $5.81 to $8.97. Hallelujah, inflation! In dollar terms, inflation covers up a lot of sins.

Winners Save Face People still go to the movies. And in a year with a few big winners, the whole industry looks better even though many studios are still limping along. In 2017, the top four movies grossed $1.82 billion. In 2018, the top four grossed 32% more: $2.4 billion — or 20% of total ticket revenues. Ultimately, whether the industry has a good year or a lousy year depends on just a handful of flicks. This year Disney’s “tentpole” releases could make or break the stats for the industry as a whole despite the structural decline that saw per-capita ticket sales plunge 24% since 2002. Wolf Richter, editor in chief of wolfstreet. com, writes about business and financial issues with an eye toward exposing shenanigans, entanglements and opportunities. @wolfofwolfst

For the first time in 22 years, movie theaters didn’t increase ticket prices last year.

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Disney’s franchise-movie strategy sets the stage for a marvelous 2019

Tentpoles in the House of Mouse By Jeff Joseph

isney dominated the world of movies in 2018, earning roughly 19% of global box office revenues. The way this year’s unfolding, Disney may grab an even bigger percentage of the take. But that’s a bigger slice of a smaller pie. After last year’s record year for box office receipts, January’s revenues were the lowest since 2011. Through February, domestic box office revenue was off nearly 20% from the same period in 2018. But then something marvelous occurred for Disney. Captain Marvel posted the third largest March opening in history with more than 4,300 theaters achieving nearly $800 million in global box office in its opening 10 days. luckbox expects it will close in on $1 billion. That will tilt more global box office revenue share toward Disney – but there’s much more to come from Disney’s “tentpole” release strategy for the remainder of this year. Tentpole movies are mega-budget, franchise-feeding, blockbusters with 360° ancillary revenues. They support Disney’s other business units — such as the theme parks, merchandise and the Disney Music Group — the same way a single tentpole carries most of the burden of keeping a tent upright. Think of the film Frozen. Better

80% luckbox projects

probability that Disney’s box office will exceed 20% of global box office revenues in 2019.

Captain Marvel, starring Brie Larson, earned nearly $1 billion worldwide in March.

yet, don’t think Frozen or else that earworm of a theme song will take hold in your brain. Really, let it go. Anyway, like erecting a tentpole, Disney parlayed Frozen, the all-time highest-grossing animated movie ($1.27 billion), into a franchise whose music and merchandising revenue exceeded revenue brought in by the film itself. Disney has an extraordinarily promising tentpole release queue for 2019 with sequels to Avengers, Toy Story, Frozen and Star Wars; and new live-action remakes of Disney classics including The Lion King, Aladdin and the

recently released Dumbo. Here’s the Disney 2019 release schedule, per ComScore: Penguins (April 17) Avengers: Endgame (April 26) Aladdin (May 24) Toy Story 4 (June 21) The Lion King (July 19) Artemis Fowl (Aug. 9) Frozen 2 (Nov. 22) Star Wars: Episode IX (Dec. 20) Besides that stellar list, Disney also controls the film franchises it picked up with the acquisition of Fox, including Dark Phoenix and New Mutants. It’s looking like another banner year in the House of Mouse.

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Big Media & Entertainment This theater sector analyst and trader projects a happy ending

AMC Entertainment: Time to Buy a Ticket By Andrew Cowen

“RGC is the second largest domestic movie theater operator by screen count. Regal (and the movie theater industry, in general) has been a favorite and poorly chosen company among the short-selling community… This down move is an opportunity, particularly in light of a good box office year with a decent looking slate for 2018 as well.” RGC was trading at $20.75 in mid-2017. Six months later, Cineworld Group (CINE) acquired RGC for $23 a share.

PHOTOGRAPH: SHUTTERSTOCK

This month, when luckbox was seeking an authoritative voice on the movie theater sector, the search led to fund manager Andrew Cowen, who’s traded theater stocks for more than 15 years. In mid-2017, when theater stocks were under heavy selling pressure, Cowen was brimming with optimisim for Regal Entertainment Group, which has since been acquired. He made the following statement in a June 2017 article, Rumors of the Movie Theater Industry’s Death are Highly Exaggerated.

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nvestors harbor a dark skepticism of movie theater chains in general, but their distrust of AMC Theatres seems especially deep. AMC’s stock has lost more than half its value since the company acquired a series of competitors in late 2016 and early 2017. The stock remains under pressure despite excellent and relatively steady cash flows and financial results that beat expectations for fourth quarter and full year 2018. AMC has many detractors with 20% short interest. The short thesis is based on two main legs – one old and one new. Neither is correct. The old short thesis holds that Americans don’t go to the movies anymore. There’s supposedly too much competition for their eyeballs from the likes of Netflix, Hulu and Amazon Prime. The competition thesis simply rehashes a concern that surfaces anytime new technology rolls out. Similar arguments were made over the years against movies with the advent of television, cable television with movie channels, home gaming systems, the VCR, pay per view, the DVD and now streaming services. With all of that innovation, some might think movie theaters are going the way of the buggy whip. In reality, U.S. box office receipts set a record in 2018, and it was one of three record years in the past four. What other “dying” industry just posted its best revenue year ever? Still, critics point out that 2018 U.S. movie attendance – the number of people sitting in the seats – decreased 17% from its 2002 peak. But they’re cherry picking the data. The years between 2002 and 2004 were extremely good years for movie attendance. In the mid ‘90s, movie

attendance was about the same as now. Meanwhile, ticket prices have climbed more than 100% in the past 20 years. During the past 10 years, attendance has hovered around 1.3 billion, while ticket prices have increased around 20%. Besides missing the big picture on ticket sales, skeptics are missing the growth in concessions. Ticket sales have a margin of about 50% because of splits with the studios. Concessions have 85% margin. Theaters have aggressively upgraded their concession offerings to include alcohol in many locations. As a result, AMC earned more than $5 in concessions per patron in the U.S. last year, up from $3.95 in 2013 for more than a 30% increase. With those healthy revenue lines and steady margins, it’s difficult to view AMC as part of a dying breed. Yet a significant number of investors manage to do exactly that. While some misread movie industry trends in general, others misread a specific new program at AMC. AMC began offering a subscription service called A-List in June. Depending upon where they lived, initial subscribers paid $19.95 to $23.95 per month to see up to three movies per week. Bearish analysts immediately jumped on a worst-case scenario: A regular moviegoer who sees three movies per week, or 12 per month, at a full price of say $9 per ticket, would suddenly pay only $20-$24. AMC would be giving up $108 per month in revenue. Worse yet, those obsessive patrons would actually cost AMC money because the chain would have to reimburse studios as though those customers were paying full fair. So AMC would be paying

$54 to the studios (half of $108) and only collecting $20-$24. In reality, however, the A-List works exceedingly well for AMC. The average subscriber was going to the movies 2.8 times per month as of AMC’s Q4 2018 earnings release. At worst, AMC is sacrificing only a few dollars of ticket revenue if those customers were normally going 2.8 times per month and paying full fare. However, AMC said on a recent earnings call that the average A-List member was going to the movies only once every two months and bringing full-fare customers with them. In other words, the program is meaningfully increasing attendance. What’s more, the new attendees are spending on high-margin concessions. The A-List could exit 2019 adding 5% to AMC’s EBITDA, and it is doing so by providing steady, predictable revenue – unlike the box office, which depends heavily upon what movie is showing. The data contradicts negative views of the movie theater business and of AMC in particular. Similar flawed arguments were made against Regal Cinemas for years. Regal shareholders were bought out at generous terms by Cineworld Group in 2017. Cineworld, in turn, is doing extremely well with those assets. AMC is close to the low end of its valuation range since it became public. This low multiple does not mesh with the company’s current state or its trajectory.

AMC concession margins

Andrew Cowen is head of Equities at Community Capital Management, an investment advisor. He’s co-portfolio manager of funds that include Community Capital Alternative Income, Quaker SmallMid Cap Impact Value and Quaker Impact Strategic Growth.

I struggle to think of another industry that is ‘dying’ but also just posted its best revenue year ever.

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Big Media & Entertainment

A clear favorite is emerging as Disney and Netflix co-opt each otherâ&#x20AC;&#x2122;s business models in a battle for entertainment dollars

Disney vs. Netf lix: The Battle for Big Media By David Trainer & Sam McBride

The Office (U.S. version), the most-viewed show on Netflix last year, accounted for 7.2% of the streaming serviceâ&#x20AC;&#x2122;s views. More than 50% of the 50 most popular shows on Netflix are owned by companies planning to launch their own streaming services, including Disney, WarnerMedia and NBCUniversal (which owns The Office). Disney released the three topgrossing films of 2018: Black Panther ($700 million) Avengers: Infinity War ($678 million) and Incredibles 2 ($609 million).

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The harder Netflix (NFLX) and Disney (DIS) battle each other, the more they look alike. Netflix got its start by distributing entertainment content and then began producing it, while Disney has done the opposite. The resulting rivalry appears likely to turn vicious this year and may end with a single victor.

t’s a clash that’s been a long time in the making. In 1923, brothers Walt and Roy O. Disney began creating silent films that combined live action and animation. (No, Mickey’s Steamboat Willie cartoon wasn’t their first effort.) As the technology changed, the company produced talkies and then television shows. Now, it wants to copy the Netflix business model and begin streaming content. Netflix, founded in 1997 by Reed Hasting and Marc Randolph, found its niche in mailing rental DVDs back and forth with customers, and it later moved into video streaming. Realizing Netflix couldn’t remain a middleman forever, management began running original content six years ago with the release of the company’s first series, House of Cards. Wildfire growth Disney and Netflix have both been growing prodigiously. Netflix has gone from market capitalization of less than $10 billion in 2013 to about $160 billion today and in the process assumed its rightful place among the giants of the entertainment industry. Meanwhile, venerable-butvibrant Disney recently completed the $71 billion acquisition of 21st Century Fox.

So the battle lines have been drawn, but it may come as a surprise that licensed content still accounts for nearly two-thirds of Netflix viewing hours despite the company’s burgeoning inventory of original programming. Netflix still relies heavily on classic television shows like The Office, Friends and Grey’s Anatomy, not to mention its dependence on a catalog of Hollywood, independent and foreign films. As Netflix’s rivals begin launching their own streaming services, they’ll cancel the licenses, making Netflix less attractive to consumers just as the competition heats up. But Netflix has been preparing for the loss of its licensed content for years. As the company’s chief content officer, Ted Sarandos, said on the company’s fourth-quarter earnings call: “Our early investment in doing original content… was betting that…there would come a day when the studios and networks may opt not to license us content in favor of maybe creating their own services.” Still, creating world-class TV shows and movies requires Herculean effort, and the audience’s viewing habits die hard. As you can see in “Most-streamed on Netflix,” right, licensed television hits accounted for three of the top four streaming series

Most-streamed on Netflix Licensed series account for three of the four mostpopular shows on Netflix despite the company’s prolific production of original TV programming. 1

The Office (U.S.)

NBC

Chilling Adventures Of Sabrina

Netflix

Friends

Warner

Grey’s Anatomy

ABC

House Of Cards

Netflix

The Great British Baking Show

Netflix

Marvel’s Daredevil

Netflix

Narcos: Mexico

Netflix

The Haunting Of Hill House

Netflix

Criminal Minds

CBS

Source: Netflix data for November 2018 (U.S.)

Netflix has grown from market capitalization of less than $10 billion in 2013 to about $160 billion today. Meanwhile, Disney recently completed the $71 billion acquisition of 21st Century Fox

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Big Media & Entertainment

Making acquisitions work Disney’s knack for creating value through acquisitions has boosted the company’s financials.

Sources: New Constructs LLC and company filings

on Netflix for November 2018. The most-popular classic TV shows aren’t cheap. Netflix reportedly paid $100 million to keep Friends on its service for 2019, more than triple its previous licensing fee of $30 million. While that’s a hefty price tag for a series that’s been off the air for almost 15 years, it’s still watched more than the vast majority of Netflix’s new releases. Unfortunately for Netflix, it won’t be able to keep Friends forever. Warner Media plans to launch a streaming service later this year. And the potential trouble for Netflix doesn’t end there. Disney, which owns Grey’s Anatomy, will also launch its streaming service in 2019, while NBC Universal will likely want to reclaim the rights to

The Office when it launches its own service in 2020. So what happens to Netflix when it loses those shows? It gets worse. It’s not just that licensed shows accounted for 63% of viewing hours in November 2018. As recently as 2017, more than 40% of Netflix subscribers watched licensed content almost exclusively. Even if original programs have cut that number in half over the past year and a half, that still leaves one in five domestic Netflix subscribers (nearly 12 million people) who almost never engage with the roughly 700 original TV shows the company produced last year. In fact, the sheer number of Netflix originals might be making the licensed content problem even

worse. Research suggests that when consumers are presented with an overwhelming array of content, they tend to retreat to the programs that are most familiar to them. The giant keeps growing As Netflix spends on originals to try to counteract the loss of licensed content, Disney has expanded its content library with the 21st Century Fox acquisition. Consider what Disney has gained: A vatar, the highest-grossing movie of all time, with a rumored four sequels in the offing X-Men and Deadpool, which round out the Marvel Cinematic Universe Smaller, but still-successful franchises like Ice Age and Planet of the Apes A large number of critically acclaimed TV series from the FX network that can meaningfully contribute to a potential streaming service A controlling stake in Hulu, which is currently growing at a faster rate than Netflix While most acquisitions destroy value, Disney appears to be among a handful of companies that can reliably create value through acquisitions. Few companies can match Disney for brand value, creative expertise or breadth of content monetization channels. Those assets enable the company to buy up beloved intellectual property (including Pixar, Marvel and LucasFilm), churn out multiple blockbuster films, and then aggressively monetize the success of those movies

Disney has acquired beloved intellectual property created at Fox, Pixar, Marvel and LucasFilm and could monetize those movies through theme park attractions, licensed toys and spin-off TV series

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PHOTOGRAPH: REUTERS/BRENDAN MCDERMID

through theme park attractions, licensed toys and spin-off TV series. Those abilities have helped Disney significantly improve its profitability during the past 15 years, and they represent the company’s most significant advantages in the content wars with Netflix. Disney’s long-term track record of success at creating value through acquisitions has helped improve return on invested capital (ROIC) from 7% in 2005, the year before it bought Pixar, to 12% TTM (the trailing 12 months). (See “Making acquisitions work,” left.) Disney projects the Fox acquisition will add $3.6 billion in profits and cost synergies, which equates to a 5% ROIC. However, Disney’s focus on efficient capital allocation, along with a record of growth and profitability, should give investors confidence that the long-term ROIC of that will climb even higher. Besides acquiring valuable assets in the Fox deal, Disney will partner with one of the few media companies that has managed to rival it in terms of profitability in recent years. Since 2014, both Disney and Fox have consistently earned a higher ROIC than their peers. (See “Combining the best,” right.) By acquiring Fox, Disney gained great content while absorbing the company that poses the most competition. The new Disney+ service now owns critically acclaimed FX shows such as Atlanta, The Americans and Fargo to complement its existing, more family-friendly content. Disney will also be licensing thirdparty content for its streaming service, which will enable it to build out an impressive content library even as Netflix’s library shrinks. Add the fact that Netflix is raising its price again this year, from $11 per month to $13 per month, and plenty of subscribers may contemplate switching. Disney CEO Bob Iger has promised to price Disney+ below Netflix, so the service could

Combining the best Besides acquiring valuable assets by buying Fox, Disney tied itself to one of the few media companies that rivals it in terms of profitability.

Traders work the post where Disney stock is traded on the floor of the New York Stock Exchange.

Sources: New Constructs LLC and company filings

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Big Media & Entertainment

The Netflix dilemma Disney’s approach stands in stark contrast to Netflix, which seems to want its service to be all things to all people. Netflix’s investment in original content was supposed to give

it the ability to dominate a variety of TV and movie genres. However, the company seems reluctant to acknowledge that its original content strategy has not achieved that goal. When Ted Sarandos, Netflix chief content officer, acknowledged that Netflix’s original content strategy aimed to help offset the loss of licensed content, Sarandos also said: “The vast majority of the content that is watched on Netflix are our original content brands.” As the statistics show, however, that answer’s simply untrue. Sure enough, Hastings, the company CEO, quickly stepped in to correct Sarandos. “In unscripted (reality TV) now, it’s our first category,” he said. “Where a majority of the viewing is a branded original, in the other categories we’re climbing – not yet at a majority, but on track for it.” Netflix spent $13 billion on content last year, with 85% of new spending earmarked for original programming. For that much money, they should be more than just “on track” for originals to domi-

nate viewing in every category. Rather than acknowledge the limitations of the strategy, however, Netflix appears determined to throw more money at the problem. The company hasn’t released a specific content budget for 2019, but management expects content costs to continue growing at a rate similar to its previous trajectory, which would put the company on pace to spend $17.5 billion this year. But revenues aren’t growing fast enough to cover rising expenses, as can be seen in “Overspending?” page 35. As a result of rising content costs, Netflix has been forced to take on debt at increasingly higher costs. Since 2014, Netflix has raised more than $9.8 billion (6% of market cap) in debt. Since 2017, its cost of debt has risen by 275 basis points to 6.375%. If the bond market loses its willingness to fund Netflix’s content spending, the company’s streaming strategy could go up in smoke. Netflix microbubble? The Netflix stock microbubble may burst in 2019 if the credit market tightens or patrons migrate to Disney+. Netflix appears significantly overvalued because of unrealistic expectations for profit growth and market share gains. Conversely, Disney looks like a winner. Its valuation is depressed because of overblown fears that Netflix will hurt the profitability of its existing business. If the Netflix business model proves unsustainable, and Disney shows it can compete successfully in the streaming business, a great deal of the investor capital currently allocated to Netflix should flow to Disney instead. Both have market caps of $160 billion, but much different free cash flow (FCF). Disney has generated nearly $20 billion in FCF during the past three years, while Netflix has lost more than $10 billion. (See

PHOTOGRAPHS: (IGER) NICKY NELSON/WENN.COM; (HASTINGS) REUTERS/PAUL HANNA

Disney chairman and CEO Bob Iger (left) pulled down compensation of $65.6 million in 2018. Reed Hastings, chairman and CEO of Netflix, has personal net worth of $3.7 billion. according to Forbes.

prove an attractive alternative. In addition, Disney already has a rapidly growing streaming service in Hulu, which recently topped 25 million subscribers, up 50% from a year ago. Disney plans to expand Hulu internationally, which could drive significant growth. ESPN+ also has been a modest success for Disney. The sports streaming service, which offers events and shows that aren’t broadcast on its cable networks, topped two million subscribers in its first year. Many analysts were skeptical that the second-tier content offerings would find a following, but the service’s quick growth suggests otherwise. Each of these offerings helps Disney segment its audience and maximize the value of its content.

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“Winner and loser,” page 36.) As you can see in “Looking for growth,” page 36, despite its negative free cash flow, 99% of Netflix’s current stock price depends on future cash flow growth. On the other hand, Disney’s valuation implies less than 20% growth in future cash flows. Despite its history of negative free cash flow, Netflix is valued as though it will become as profitable as Disney. Meanwhile, Disney is valued as though its profits will barely grow – despite a history of profit growth.

Overspending? Netflix expects to spend $17.5 billion creating original content this year, but revenues aren’t growing fast enough to cover the tab.

Avengers: Endgame, one of Disney’s next “tentpole” releases, was scheduled to open April 26. Boxoffice. com projected a “titanic” $265 million opening week.

Sources: New Constructs LLC and company filings.

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Big Media & Entertainment

Winner and loser

Looking for growth

Both have market caps of about $160 billion, but Disney has generated nearly $20 billion in free cash flow over the past three years, while Netflix has lost more than $10 billion.

Despite its negative free cash flow, 99% of Netflix’s current stock price depends on future cash flow growth. On the other hand, Disney’s valuation implies less than 20% growth in future cash flows.

Sources: New Constructs LLC and company filings

Robin Wright played Claire Underwood, who rose to the presidency in House of Cards, the first Netflix series.

The Content War Given their respective valuations, the market apparently expects Netflix to win the upcoming conflict with Disney. However, the market is overrating Netflix’s temporary advantages while underrating Disney’s more durable competitive strategy. Netflix has two key advantages in its quest to become a global media giant: First-mover advantage: Netflix was the first to build a major streaming platform, and that’s helped it reach nearly 150 million subscribers. However, the firstmover advantage doesn’t last long.

Content budget: Netflix’s decision to spend billions on content has helped the company drive rapid growth in the short-term. However, its content binge isn’t sustainable. At some point, Netflix will have to stop funding its content library through debt markets, and it will then face the unenviable choice of raising prices or scaling back spending, either of which will hurt its subscriber numbers. On the other hand, Disney enjoys three durable advantages that should help it remain the world’s largest media company for decades to come: Timeless brands: Consumers in the current age of “Peak TV” tend to flock to the familiar. While Netflix spends billions on new content, Disney can fall back on its wide array of timeless brands that produce reliable blockbusters year after year. Platform value: Netflix has only a single stream of revenue, limiting its ability to monetize content. Disney, on the other hand, can monetize content through movies,

cruises, licensed toys and, soon, its own streaming platforms. R esources and scale: While Netflix depends on the bond markets to fund its content spending, Disney generates enough cash flow to fund its content. With more than $8 billion in free cash flow during the trailing 12 months, Disney has the resources to increase its content budget drastically if the need arises. With Netflix facing increased competition and the loss of licensed content over the next year – while it simultaneously raises the prices it charges – 2019 is shaping up as the year that Netflix’s temporary advantages dry up, while the market begins to appreciate the long-term success of Disney’s business model. David Trainer is CEO of New Constructs, an independent equity research firm that uses machine learning and natural language processing to parse corporate filings and to model economic earnings. Sam McBride is an investment analyst at New Constructs. @newconstructs

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Cord cutting is growing faster now than at any other time in U.S. history. luckbox looks at the reasons behind the phenomenom

Cable TV? Cut It Out By Luke Bouma

ord cutting saw astounding growth in 2018, with more than 2.5 million American households joining the movement. It continued picking up speed at a phenomenal rate as 1.1 million Americans canceled cable TV in just the last three months of 2018 alone. As 2019 unfolds, consumers will find it easier than ever to cut the cord, cancel cable TV and still retain the ability to watch the shows they want. Cord cutting has had a devastating effect on the Big 5 pay-TV providers — AT&T (T), Charter (CHTR), Comcast (CMCSA), DISH (DISH) and Verizon Fios (part of Verizon Communications (VZ)) — which lost a combined 2.4 million subscribers in 2018, with smaller cable networks making up the remaining subscriber losses. Those numbers do not include the losses from smaller cable TV companies like Cox, many of which do not report subscriber numbers. The news may be even worse for small cable TV companies. Some of them have even made the startling decision to walk away from offering TV services to their customers, like RTC Communications, which announced that it will end its TV service starting in July. Even the bigger cable companies are struggling. Recently, Cable One’s (CABO) CEO announced that of its 800,000 customers only 240,000, or 30%, pay for TV service; the other 70% pay only for broadband internet.

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Big Media & Entertainment “We don’t see bundling as the savior for churn,” Cable One CEO Julie Laulis says. “I know that we don’t put time and resources into pretty much anything having to do with video because of what it nets us and our shareholders in the long run. We pivoted to a data-centric model over five, six years ago, and we’ve seen nothing to derail us from that path.” Cable One is not alone in having more internet customers than TV customers. Since 2015, Comcast has experienced similar trends and recently reported that it now has about 3 million more internet customers than cable TV customers. With so many small cable TV companies not reporting numbers, it’s difficult to know with certainty how fast cord cutting is growing.

20% of Americans plan to cut the cord to cable TV in the next 12 months

was taken). That works out to more than 39 million Americans actively planning to cut the cord. Netflix (NFLX) CEO Reed Hastings has for years predicted the death of broadcast TV. During a speech in Mexico City last month he once again did so, declaring that “broadcast TV will probably last until 2030.” No one really knows when or how long it will be until cable TV dies, but the golden days of cable TV have ended and cord cutting is growing faster now than at any other time in U.S. history.

What is cord cutting? Cord cutting is canceling a traditional pay-TV provider, like cable or satellite TV, in favor of nontraditional options, such as streaming, DVDs and antennas for free overthe-air TV. Many argue that cord cutting should include the price of cable internet. However, most Americans view internet service as a necessity but consider pay-TV a luxury. Therefore, cord cutters count their savings based on the how much they save by eliminating paid-TV services. Others argue that cord cutting counts only if a user also cuts the internet cord, but most cord cutters seem happy just saving money on TV.

How much cord cutting saves A recent cg42 study published in Fortune says the average cord cutter saves $85 a month even with the cost of internet. Nationally, that works out to $2.55 billion saved every month. A study by Lendedu puts the average cord cutting savings closer to $115 a month, which means total savings of $3.45 billion. Around 30 million people are cord cutters, according to a study by the Leichtman Research Group Inc. However, some have suggested as many as 33 million have joined the ranks of U.S. cord cutters, while others put the number closer to 35 million. Savings vary by family. Some families are large; others are small. Some families watch a lot of TV and are likely to pay for more services. Other families watch less TV and are likely to subscribe to fewer services, resulting in larger savings.

The end of broadcast TV? According to UBS, 20% of Americans plan to cut the cord in the next 12 months (from the time the survey

Bottom line No matter what numbers one uses, cord cutting is saving Americans millions of dollars every month, and

that number will continue to rise as cord cutting grows. More important, that means Americans have billions of dollars to spend on things other than watching TV. While still relatively young, cord cutting is drastically disrupting the TV industry. The disruption mirrors what happened in the music industry in the early 2000s when iTunes and MP3s took over. How exactly the disruption of cord cutting will play out in the long run remains unknown. Cable companies are fighting against streaming in much the same way the music industry fought iTunes and MP3s ... and we all know what happened there. Where will cord cutting be five years from now? What will happen once it becomes impossible to fight the growing trend of cord cutting? Observers can only guess what will occur once the nation reaches the point of no return and cord cutting becomes a truly major force in the world of television. When that will happen remains unknown. Some speculate that cord cutting will become larger than cable TV in less than three years. Others suggest that with a strong economy it could take five to 10 years for cord cutting to grow larger than traditional pay-TV services in the United States. What is known is that cable companies are struggling to slow down the cord-cutting boulder that is rushing headlong on a downhill path toward them and is picking up speed by the day. Luke Bouma, who launched Cord Cutters News in 2014, has become a prominent voice of cord cutting in print, online and on the air. @cordcuttermnews

Broadcast TV will probably last until 2030.

— Netflix CEO Reed Hastings

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24 million

ESTIMATED NUMBER OF NETFLIX USERS WHO DON’T PAY FOR SERVICE

at least

7.99

BASE SUBSCRIPTION COST

192 million

MONTHLY REVENUE COST

at least

2.3 billion

YEARLY REVENUE LOST

at least

Counting Cord Cutters & Streaming 8.99 Schemers 45 540

5 million

In 2018, the total number of pay TV subscribers dropped 4.1% from a year earlier, the highest rate of decline since the trend of cord cutting emerged in 2010. About 985,000 more customers dropped cable or satellite in Q4 than signed up formillion new service industry wide.

ESTIMATED NUMBER OF AMAZON PRIME VIDEO USERS WHO DON’T PAY FOR THE SERVICE

BASE SUBSCRIPTION COST

The Big 5 Get Smaller

million

MONTHLY REVENUE COST

billion

YEARLY REVENUE LOST

Here’s how many subscribers the largest pay-TV platforms lost last year Spectrum ESTIMATED NUMBER 36,000 OF HULU VIDEO DIRECTV$ USERS WHO DON’T 658,000

PAY FOR THE SERVICE

7.99

Comcast 19,000 at least

BASE SUBSCRIPTION COST

DISH 334,000

Verizon Fios 46,000

Source: MoffettNathanson Research

million

MONTHLY REVENUE COST

at least

As many as 20% of Americans are mooching off someone else’s account when streaming video from Netflix, Hulu or Amazon Video. Netflix is pirated for the longest period — 26 months, compared with 16 months for Amazon Prime Video or 11 months for Hulu.

480 billion

YEARLY REVENUE LOST

of households paid for cable or satellite in 2018, down from the all-time peak of 88% in 2010 Source: Leichtman Research Group

MISSED REVENUE

Estimating how much money video streaming services lose to moochers Stream Scheme Here’s how much video streaming services lose to moochers.

million

Estimated number of Netflix users who don’t pay for service

Estimated number of Amazon Prime video users who don’t pay for the service

Estimated number of Hulu users who don’t pay for service

x x x

7.99

Base Subscription Cost

8.99

Base Subscription Cost

7.99

Base Subscription Cost

at least

192 million

Monthly Revenue Cost

at least

45 million

Monthly Revenue Cost

at least

40 million

Monthly Revenue Cost

2.3 billion

Yearly Revenue Lost

at least

540 million

Yearly Revenue Lost

at least

480 million

Yearly Revenue Lost

Netflix could be losing $192 million in monthly revenue from piracy — more than either Amazon or Hulu, at $45 million per month and $40 million per month, respectively Source: study results from Cordcutting (March, 2019)

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Media & Entertainment U.S. Cord Cutters 2017-2022 Individuals age 18 or over who no longer have access to traditional pay TV services

55.1%

50.2% 45.0% 39.3%

The main factor driving away pay-TV customers? Price.

33.0% 70% of pay-TV subscribers feel they get too little value for their money. 56% of pay-TV customers say they keep their subscription because it’s bundled with their home internet

24.9%

2017

2018

2019

2020

2021

2022

Source: eMarketer, July 2018

Source: Deloitte’s 2018 Digital Media Trends Survey

The average pay-TV bill in 2017 totaled $100.98 per month, which represents a 5.5% compound annual growth rate between 2000-17. That’s an opportunity for the lower-cost “virtual” pay-TV entrants. Multichannel streaming services will reach nearly $2.82 billion in revenue in 2018, rising to more than $7.77 billion by 2022. Among those services, average revenue per subscriber is roughly one-third that of traditional cable TV. Source: Kagan Research

Tipping Point: Last year marked the first time more Americans subscribed to streaming than to cable 40

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The Low Spark of High-Yield Stocks With a little knowledge and hard work, traders can beat the return on high-dividend stocks and avoid the trap of inadvertent risk

Mostly upward Despite hiccups, the S&P 500 has generally trended upward in recent years.

By Michael Rechenthin

lexander Pope got it right in 1711 when he wrote that “a little learning is a dangerous thing.” His words still ring true for one of the simplest and most-promoted approaches to investing – buying high-yielding stocks. It’s one of the first strategies new investors learn and, unfortunately, it’s sometimes all they learn. Admittedly, high-dividend stocks can seem appealing. They hold the allure of earning 6% or 8% a year via cash flow, and Wall Street touts them as a sound way to build wealth. But buying high-yield stocks doesn’t always lead to success, and a slight modification of the strategy can increase returns. Historically, investing for dividends has been stable, often with 25% to 50% less risk than investing in stocks that don’t pay dividends. The idea is simple — investing in companies that pay dividends can accomplish two things. First, the income stream makes the stock position similar to a bond (without the guarantee of principal). Second, there’s the potential to make money on the growth of the stock price, which would be a capital gain. Dividend investing is popular among retirees

Buying high-yielding stocks is one of the first strategies new investors learn and, unfortunately, it’s sometimes all they learn

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Yield categories Not all dividends are created equal. Yield Category

Dividend Yield

Examples

No Dividends: 15% of stocks fall into this category

Amazon, Facebook, Google

Low Yield: 25% of stocks fall into this category

Under 2%

Apple, Nike, Microsoft

Average Yield: 50% of stocks fall into this category

2% to 4%

Waste Management, Wal-Mart, Coca-Cola

High Yield: 10% of stocks fall into this category

Greater than 4%

Western Digital, Macy’s, Ford, Helmerich Payne, CenturyLink

Stocks that pay big dividends tend to have low capitalization and lots of volatility

because the income stream provides positive cash flow every quarter. Plus, growth in the stock price can help a portfolio keep pace with inflation. Generally, buying high-yield stocks has worked well. Look at the five-year performance of the S&P 500: It’s up 50%, and adding the dividends boosts it to a 70% increase! There’s a difference of 20% because of dividends — small dividends — which historically have had around 1% to 3% increase per year. It’s that extra return over and above the gains in the stock price that makes the high dividend so attractive — but it doesn’t always pay off. It’s easy to become enamored of dividend yield. “If I like the stock with a 2% dividend yield, I’d love one with a 6% dividend yield,” some readers are thinking. But larger dividends don’t always lead to higher returns because high yields can make investors overlook risk. Anyone who assumes dividend investing is low risk and then buys a stock that

Date with a dividend

High yield, small cap Stocks with Dividends Under 4%

High-Yield Stocks with Dividends Over 4%

Six-month total return

-3%

-10%

Percentage of stocks in this group that have seen an increase in stock price over the past six months

50%

20%

moves up and down 20% month-to-month has made an inappropriate investment. Instead of dividend investing, they have unwittingly become “dividend speculators.” While the original appeal of dividends was less risk, inadvertent speculators have actually taken on more risk than they had wanted. So, what exactly is the definition of a highyield dividend stock? Investors can improve their understanding of the dividend landscape by exploring the 500 stocks in the S&P 500. About 90% of those stocks pay dividends of less than 4% a year. Examples include Apple (AAPL), which pays less than 2%, and Coca-Cola (KO), which pays 2% to 4%. Stocks with dividends of more than 4% a year are considered high-yield, and investors should handle them with caution. (See “Yield categories,” left.) The problem with high-yield dividend stocks is two-fold for “safety seeking investors.” First, any gain from having a higher dividend has been lost during the past six months because of the declining stock price. (See “High yield, small cap,” below.) While stocks are down 3% over the past six months, high-dividend stocks are down 10%. Only 20% of high-yield stocks were up, compared with 50% of the rest of the stocks. High-yield stocks tend to have small capitalizations (on average 10 billion smaller), which makes them more volatile and sensitive to shifts in the economy or changes in their industry. Think of what happens when a company begins having problems — it cuts the dividend. Today’s high yields may not exist tomorrow. Because dividends come from a company’s excess cash, they are often first on the chopping block. That can lead to a further decline in stock price because shareholders

Companies generally pay stock dividends four times a year. Two dates have particular importance – the ex-dividend date and the payment date. The ex-dividend date. That’s when it’s too late to receive the dividend. The investor has to own the stock one business day prior to the ex-dividend date to qualify to receive the dividend. The payment date. It’s when the company pays the dividend.

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Downtrend Stock prices often fall after a company cuts its dividend. That fate befell CenturyLink (CTL, left) and Limited Brandsn (LB, right). The graphs show the stocks before and after the company dividend was cut (CTL on the Feb 14, announcement, and LB on the Nov 19, announcement).

no longer have cash flows. Recent examples include CenturyLink (CTL) and Limited Brands (LB). They lost 9% and 20% respectively the day after management announced a dividend cut. Even GE, once one of the largest companies in the world, cut its dividend when it faced problems. To further complicate things, as stocks decrease in price, the amount of the dividend might stay the same — at least for a while — but the yield will increase. The math is simple. Dividend yield equals the dividend amount divided by the stock price. Keep the dividend the same but drop the stock price, and yield goes up. A decrease of 50% in the price of the

stock doubles the yield. But the company can rarely sustain that yield. For example, in the financial crisis of 2008, the dividend yields spiked for a bit. But within a few months, more than 100 stocks in the S&P 500 cut dividends. So, while investors at the bottom might have gotten some deals, they didn’t have the yields they were expecting. Many astute investors focus their attention on the S&P 500 Dividend Aristocrats. These stocks have increased their dividend payouts for 25 consecutive years or more. By focusing on the Aristocrats, investors limit their lists of potential dividend investments to historically stable companies. On average, the size of those

Financial aristocracy The S&P 500 Dividend Aristocrats have increased their dividend payouts for at least 25 consecutive years. Stock

Symbol

Dividend Yield

Annual Income per $5,000 Invested

Walgreens Boot Alliance

WBA

2.8%

$140

MMM

2.8%

$139

Johnson & Johnson

JNJ

2.6%

$131

Lowe’s Companies

LOW

1.9%

$95

Colgate-Palmolive

2.6%

$128

companies is $75 billion — they’re large international companies. They outperformed the overall market seven of the past 10 years. (See “Financial aristocracy,” below.) In last month’s article, “The Case for Proactive Investing,” luckbox made the argument that covered calls help accentuate returns along with reducing overall risk. Investors can use that approach for stocks in the S&P 500 Dividend Aristocrats. It provides the best of both benefits – a consistent cash stream from the dividends, along with a cash flow from the covered calls. Here are two ideas: Trade Idea 1: Buy 100 shares of Walgreens Boots Alliance (WBA), and sell an out-of-themoney call in the next month’s expiration. Trade Idea 2: Buy 100 shares of 3M (MMM), and sell an out-of-the-money call in the next month’s expiration. Both ideas offer the advantage of gaining access to the dividend, while also having the potential to double or triple the income received every year. So, don’t stop with the simple stuff Wall Street promotes. With just a little more work and a little more knowledge, investors can turn dividend investing into the lower risk/higher return strategy they’ve been hoping for. Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.

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trends life, luxury & the pursuit of happiness

LIQUID ASSETS

Heavy-Metal Whiskey Metallicaâ&#x20AC;&#x2122;s new Blackened American Whiskey strikes many chords, but is it worthy?

By Jeff Joseph 44

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Blackened is the end Winter it will send Throwing all you see Into obscurity Death of Mother Earth Never a rebirth Evolution’s end Never will it mend — Lyrics from “Blackened” from … And Justice for All (1988) Metallica’s fourth studio album

PHOTOGRAPHS: (METALLICA, BLACKENED) COURTESY OF LION & LAMB COMMUNICATIONS; (TASTING) GARRETT ROODBERGEN

plifting lyrics. If you’re not a whiskey drinker by nature, there’s nothing like pondering the post-apocalypse to get you in the spirit. Perhaps that’s what heavy-metal heavyweights Metallica had in mind with their introduction of Blackened American Whiskey, a carefully calculated marketing collaboration staged with Kardashian acuity. We were cynical when we learned of Metallica’s new whiskey. Celebrities are still trying to duplicate George Clooney’s $1 billion sale of his Casamigos tequilla company to Diageo plc (DEO) in 2017. Big names that grace spirits bottles include Ryan Reynolds, Ludacris, Dan Akroyd, Danny DeVito, Pharrell Williams, Bob Dylan, Jay-Z, Sean Combs, Justin Timberlake and David Beckham. But to their credit, Metallica chose not to simply play along. They cranked the volume up to 11 and partnered with Dave Pickerell, a revered master distiller, to craft their new whiskey. Pickerell earned his industry cred during his 14-year tenure at Maker’s Mark and then became one of the most highly regarded consultants in the craft spirits industry. He’s helped launch hundreds of distilleries, including ultra-successful brands such as Whistle Pig. With Metallica’s choice of the name Blackened, Pickerell saw an

opportunity to try something new and he finished the whiskey in black Spanish brandy barrels. Then Pickerell used a “sonic maturation” technique developed by Hudson Whiskey to reduce (costly) barrel-aging time. Quality whiskey requires years of aging in charred barrels to take on color and flavor profiles. The longer the age expression, the more complex the character of the whiskey. But Hudson Whiskey distillers discovered they could accelerate maturation by exposing whiskey barrels to a pair of subwoofers emitting bass tones that agitated the liquor inside. What could be more agitating than a Metallica playlist? So the blending team bombarded the whiskey with ultra low frequency Metallica tunes. Hence the marketing tagline, “born in cask, forged by sound.” Metallica explains: “This causes the molecules to become excited and penetrate deeper into the barrel, where it picks up additional wood flavor characteristics.” But simply exciting the molecules at random wasn’t good enough for professional musicians. Instead, Metallica chose specificity and diversity. So the producers vary the playlist used to enhance the whiskey during finishing. The movement of the whiskey and the amount of interaction depends on which song is played, so the variation in the music creates a slightly differing nuance from one batch to the next.” The marketing people put it this way: “Each unique playlist produces a unique flavor profile.” OK, you had us at Metallica, but you may have lost us with that playlist = uniqueness claim. Not new to this (having previously side-hustled a successful spirits start-up that went on to become a popular Vodka brand), I sought out whiskey tasting event promotor and independent bottler Dave Sweet to bring another palette to a Blackened taste test.

We obtained a bottle of batch #085 for our taste test, mainly because the song titles on the playlist resonated with all the hope and optimism of a burial crypt (see below). Sweet had some nice things to say, describing the whiskey as balanced, pleasant and approachable. Blackened displayed a distinctively “craft” nose and initial taste, according to Sweet. He found it soft and mellow right from the start, the benefit of both the blending and the brandy barrel finish. “Berry and brandy is most prominent on the middle palate,” Sweet continued. “The additional barrel finish (or perhaps mature whiskeys in the blend) also enhances the wood, but again, subtle.” The fruit of the brandy barrel overtakes the finish but comes up light and short, Sweet maintained. Water enhances the flavor but increases the alcohol and phenol so the whiskey “drinks better neat,” Sweet concluded. I thought Sweet was generous in his review. I noted Blackened’s apricot and honey tones at the outset, finishing with just a little grassy taste at the end. But the absence of aging was apparent as there was no discernable lingering complexity. I am a fan of port and sherry barrel finishes, but the black brandy finish recalled the #085 playlist track, The Day That Never Comes – more noise than finish. Perhaps, we just picked the wrong playlist. But at $45, whiskey aficionados can choose from among many sophisticated alternatives with longer age expressions. Blackened represents a triumph of style over substance. Next: Whitesnake’s Whiskey?

THE BATCH #085 PLAYLIST: 1. Spit Out the Bone 2. Suicide & Redemption 3. All Nightmare Long 4. The Struggle Within 5. The Day That Never Comes 6. Metal Militia 7. Creeping Death 8. Dyers Eve

luckbox’s Jeff Joseph (left) and spirits maven Dave Sweet taste black noise. Sweet is a sprits industry consultant, independent bottler and CEO of Whiskey and Barrel Nite’s, nationwide tasting events. whiskeyandbarrelnite.com

BLACKENED AMERICAN WHISKEY

smart branding for an average whiskey

Blackened is 90 Proof, 45% ABV

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trends

WELLNESS

Don’t Overheat Meat An active trader dishes on how sous-vide cooking saved his diet By Tom Preston

love beef, pork, chicken, fish and turkey — even buffalo and the occasional deer. But after what I call my “cardiac adventures,” I’ve been eating healthy by cutting back on four-legged meat and moving toward heart-friendly chicken, turkey and salmon. OK, I can deal with that. What I can’t deal with, though, is crappy food. And if any of those proteins is overcooked, it’s like eating cardboard mixed with sand. While I’m an OK cook, it’s easy to overshoot the temperature on those foods, rendering them largely inedible and leaving me hungry. But in my search for a way to cook poultry and fish and the occasional steak to the perfect temperature, I discovered the sous vide! Sous vide is both a specific tool and a manner of cooking that solves a big problem. Cooking with a pan, grill, oven, pot or even a microwave is like trying to hit a moving target. The chicken, for example, might come out of the refrigerator at something like 38° and land on a grill that’s maybe 450°. The temperature of the meat starts a trajectory, moving from 40 degrees to 450° if left on long enough. You can’t see inside the chicken to find out when it’s done before it overcooks.

The Joule by ChefSteps runs off a smart phone app to bring sous-vide tech into home kitchens. It starts at $179.

Instant thermometers help a lot, but you have to take the chicken off at a specific time. Too soon, and it’s kind of raw. Too late, and it’s too dry. You want to cook that chicken at a specific temperature so that it’s done, but moist. The sous vide solves that by heating and holding a bath of water at a single temperature, not hotter nor cooler. The food in that bath will get no hotter than the temperature set by the sous-vide tool. The technology of the sous vide enables you to pick a temperature, perhaps 153 degrees, for example, and have a pot of water hold at that temperature for a long time. Anything in that water gets no hotter than 153°, no matter the meat: chicken, salmon or cauliflower. Compared to regular ways of cooking a chicken, it’s hard to overcook one in a sous vide. The sous vide increases the probability of culinary success. I spend my days trading and don’t have a lot of time to worry

about dinner. My sous vide lets me stick some chicken in around noon and let it cook until 5 p.m. when it’s perfectly done. It’s moist, tender, flavorful. Sous vide is not boiling. Boiling is immersing food directly into water that’s 212 degrees. With sous vide, you put the food in a watertight plastic bag and submerge it in the water. The food doesn’t become waterlogged or lose seasonings to the water. The sous vide I use runs off a smartphone app. Now, when the food comes out of the sous vide, it can be pale looking. Put it in a hot pan or a grill to brown and sear it. Badaboom…done. Sous vide is the only way I’ll cook steaks at this point. So, yes, sous vide has saved my diet. My cholesterol is obedient and I’m able to enjoy chicken, turkey and fish in all their moist glory. Even if you don’t have to worry about your diet, sous vide is too convenient to not try, especially if you’re busy. Put the odds in your favor and give it a try.

Sous Vide Explained Sous vide (French; under vacuum) means cooking food in a plastic pouch or glass jar submerged in water for a longer-than-normal time (one to 48 hours or more) and at an accurately regulated lower-than-normal temperature (131° to 140° for meat, and higher for vegetables).

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trends

ARTS & MEDIA

Movies about the markets

Rotten Tomatoes ratings 60% or = higher

From dismal to dynamite, Hollywood films denigrate, celebrate or satirize the world of finance Top 10 Rotten Tomatoes:

Top 10 box office:

1. Inside Job (2010) The 2008 Financial Crisis 98%

1. The Wolf of Wall Street (2013) Penny Stocks 78% Box Office $392M

2. Enron: The Smartest Guys in the Room (2005) California Electricity Crisis 97% 3. The Corporation (2003) The Evolution of Business 90% 4. The Big Short (2015) The Housing Bubble 88% 5. Margin Call (2011) Complex Derivative Instruments 88%

Trading Places

6. Arbitrage (2012) A Troubled Hedge Fund Magnate 88% 7. Trading Places (1983) Orange Juice Futures 86% 8. Equity (2016) An IPO Gone Wrong 83% 9. The Wolf of Wall Street (2013) Penny Stocks 78%

Wall Street

59% or = lower

10. Wall Street (1987) Good Gekko Greed 78%

The Wolf of Wall Street

2. Wall Street: Money Never Sleeps (2010) Wall Street Sequel 55% Box Office $134.7M 3. The Big Short (2015) The Housing Bubble 88% Box Office $133.4M

7. American Psycho (2000) An Insane Investment Banker 68% Box Office $34.2M

4. Money Monster (2016) Financial Advisor Thriller 58% Box Office $93.2M

8. Boiler Room (2000) Pump and Dump 66% Box Office $28.7M

5. Firewall (2006) A Banker Steals Millions 18% Box Office $82.7M

9. Margin Call (2011) Bilking the Bosses 80% Box Office $19.5M

6. Arbitrage (2012) A Troubled Hedge Fund Magnate 88% Box Office $35.4M

10. Capitalism: A Love Story (2009) Michael Moore Has At It 75% Box Office $17.4M

HONORABLE MENTION Make Way for Tomorrow (1937) Acclaimed for its heartbreaking performances, this nearly forgotten film depicts an elderly, depression-era couple who lose their home to foreclosure in the aftermath of the market collapse and are forced to split up when they move into the separate homes of their adult children. 100% • “It would make a stone cry.” — Orson Welles

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ARTS & MEDIA

THE HUMMINGBIRD PROJECT Finance meets tech in a new thriller called The Hummingbird Project. Writer-director Kim Nguyen spins the tale of two youngish cousins who quit their jobs at a New York-based hedge fund that specializes in highfrequency trading to dig a 4-inch fiber-optic tunnel between the Kansas Electronic Exchange Data Center and the New York Stock Exchange servers in New Jersey. They’re out to create a 1,000mile straight line a few inches wide and six feet underground. They’ll have to pierce the Appalachians and traverse swamps, rivers, forests, cropland, pastures, and lots of citizens’ front and back yards. Why? To get rich by shaving a millisecond off the time it takes to get stock quotations. That would make the cousins the first to know what the big players are buying and what they’re paying. Then their computer algorithms would help the cousins jump to the head of the line and make the right trades before their competitors. Both protagonists supposedly know why they’re seeking big-time wealth. Business-savvy Vincent (Jesse Eisenberg) tells a prospective investor of being knocked unconscious and having a vision of a shadowy man imploring him to “hold the line.” Until he builds the line, he won’t know what’s at the end of it, or so goes his phonysounding spiel to a prospective investor. Vincent’s cousin and partner, tech savant Anton (Alexander Skarsgård), simply wants enough cash to hide out in a country house on a hill. There, Anton plans to spend his days with his wife, two kids, and lots of computer codes. As a foil, the cousins have

their former boss, Eva (Salma Hayek), who hurls profane insults at employees and titillates investors with tales of what she calls “nanosecond financial engineering.” When Vincent and Anton quit their jobs, Eva claims contractual ownership of the cousins’ ideas and warns them that they’re leaving empty-handed. Threats aside, the cousins and their tunneling engineer, Mark (Michael Mando), soon dispatch 54 crews to dig along a line extending from the Great Plains through the Midwest and nearly to the East Coast. They’re simultaneously engaging countless landowners for the right to pass under properties. The race — always a handy dramatic element for a movie — is on. As the heroes rush to finish the project before the money runs out, they encounter monumental encumbrances. Recalcitrant Amish farmers who plow with horses don’t want to help the world go faster by allowing right-of-way for a tiny tunnel beneath their land. The drill bits are no match for stubborn veins of granite lacing the mountains. No matter what, the team has to maintain the straightest possible line to avoid slowing the transfer of information. At the same time, they’re racing to improve their coding enough to slice a millisecond off their roundtrip time or else the project won’t produce faster communications than the everimproving competing methods. Meanwhile, yet another race is taking shape. Back in Manhattan, Eva has her minions hard at work on a pulse-shaping algorithm that would enable microwave towers to send signals that make the roundtrip between Kansas and New Jersey in 14 milliseconds,

Traders take to the woods in a desperate scheme to speed up stock quotes.

which would beat the heroes’ time by a full two milliseconds. Other complications arise, too, intensifying the race, raising the stakes and lowering the probability of success. The affair eventually becomes a matter of choosing a safe life or risking untimely death. The movie’s not in the “based on a true story” Hollywood mold, but it was inspired by real-life headlines and non-fiction books. Montreal-born filmmaker Nguyen became fascinated with high-speed trading after reading Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt. Nguyen based the characters he created on speed-obsessed “quants.” They’re the physicists, engineers and mathematicians who have become financiers and now generate more than half of all U.S. stock trading. The film blends elements of a buddy picture and a road movie. It grazes the peripheries of finance, technology, science, avarice and dreams. It’s entertaining for most moviegoers, but experienced investors shouldn’t expect to come away with a deeper understanding of trading. — Ed McKinley

THE HUMMINGBIRD PROJECT

a fact-based piece of film fiction with welldrawn characters willing to sacrifice family and even life itself to fulfill their dreams

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BLACK MONDAY MOTHER JONES Imagine a TV comedy series that begins with a man in a business suit sitting on the curb crying. On the sidewalk behind him, black-clad punksters spray graffiti on an ornate stone pillar. Stray pieces of paper flutter across the deserted urban landscape. Funny? But wait. Things seem to be improving as an impossible-looking red Lamborghini stretch limo comes screeching to the curb. It looks cool. Then, just as the viewer relaxes a bit, a body plummets from a skyscraper and crushes the Lambo’s roof. Funny yet? Well, it’s supposed to be. Those are the opening moments of Episode 1 of the Showtime series Black Monday, which premiered in January and has been renewed for another 10 episodes. From those very first scenes, it’s readily apparent that basing a comedy on the stock market crash of 1987 isn’t easy. A lots of viewers just don’t see the humor in people being stripped of their wealth. Shows like Jackass aside, only a small portion of the cable TV audience truly enjoys laughing at the misfortune of others. What’s more, it’s difficult for the show’s creative types, who were children in the ‘80s, to portray the feel of the era convincingly. Admittedly, the series looks good. It’s filled with period-correct cars, lapels, neckties, afros and mohawks. The customized jeans jackets, beefy women’s shoulder pads, shoebox-sized “mobile” phones and grafitti-laden subway cars all seem perfect for the times. But the writers coat the dialogue with a layer of period references that’s much too thick. Who would have bragged to a stranger about smoking crack with D.C. Mayor Marion Barry? Some scenes strain credulity. Would the action really stop on the floor of the New York Stock Exchange so traders could listen to a trader’s humorless rant? As with so many television comedies, the milieu doesn’t matter. The world of finance simply provides a background BLACK MONDAY for an endless parade of gags. Investors would do well to skip this one. cocaine and graffiti Instead, why not watch aren’t enough to The Big Short again on invoke the feeling of Netflix or Amazon? the 1980s — Ed McKinley

Mother Jones (MoJo), a news organization launched in 1976, is named after IrishAmerican labor activist Mary Harris “Mother” Jones. MoJo publishes a quarterly print magazine featuring investigative journalism on politics, the environment, culture and human rights to 200,000 paid subscribers. As with MoJo’s roots, the publication’s backers, contributors and editors are unapologetically left-leaning. Activist documentary filmmaker Michael Moore had a contentious four-month reign as editor of MoJo in 1985, culminating with his abrupt firing. David Corn, the Washington bureau chief of Mother Jones, also serves as an on-air analyst for MSNBC MoJo’s carefully researched stories make it a credible source of opinion. Headlines from a recent issue demonstrate its depth, diversity and timeliness: Hooked: How a loosely regulated rehab industry baits recovering drug users into a deadly cycle. We Will Bot You: Artificial intelligence could put a lot of composers out of work — and transform the way we make music. The April MoJo cover story about Facebook generated a lot of interest among the editors at luckbox, who had just awarded Facebook CEO Mark Zuckerberg the dubious distinction of naming him

luckbox of the month. That issue of luckbox also contained excerpts from Jonathan Tepper’s The Myth of Capitalism that were critical of Facebook (along with Google) for monopolistic business practices and undue influence on news, speech and censorship. It’s a theme that will be revisited frequently in the pages of this magazine. MoJo CEO Monika Bauerlein and editor in chief Clara Jeffery warn that Facebook may inflict even more damage on America. Like Tepper, they call for the kind of regulatory action that ensued when the likes of Standard Oil, AT&T and Microsoft had “amassed an unacceptable degree of power over the fate of our society.” Some additional excerpts: F’d: How Facebook Screwed Us All: Facebook talks about connecting us, but it’s tearing us — and our democracy — apart. “…what we now know is that, for years, Facebook has been aware that user data was being shared with outside actors and that its platform was being turned into a disinformation machine.” — Jeff Joseph

MOTHER JONES

intelligent and topical, long-form investigative journalism from a distinctly progressive political perspective

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trends

THE POKER TRADE

Russian Illusion

Rounders, the cult classic poker movie, has inspired a new generation of players to enter the world of poker and elevated Texas Hold’em to its status as poker’s most-popular game By Jonathan Little

espite a 1998 opening weekend box office of only $8.5 million and a lifetime gross of $22 millon, the film Rounders is widely considered the best poker move of all time. I’m often asked my thoughts on the iconic poker hand from the final scene of the movie, where Teddy KGB and Mike McDermott battle in a high-stakes, heads-up poker game. As the scene opens, Mike ventures into Teddy’s notorious underground poker club. Mike gets into a game and puts his entire bankroll on the line in an attempt to settle debts, prove himself and earn a chance to go to Las Vegas to play the World Series of Poker. Playing a $50/$100 heads-up, no-limit hold’em cash game with $27,000 effective stacks, Mike raised to $200 from the small blind with 9 8 . Because Mike will be out of position, he should play a tight pre-flop strategy. When you are 270 big blinds deep, it’s difficult to play out of position, especially if your opponent is overly aggressive, as Teddy clearly is. If I were in Mike’s shoes, I would have limped, which is what I would do with almost all my playable hands from out of position playing deep stacked. My goal would be to keep the pot size as manageable as possible while still seeing lots of flops with reasonable hands. I don’t like Mike’s minimum raise because it allows Teddy to call with his entire range due to getting amazing pot odds, and he can also re-raise, forc-

ing Mike to play a bloated pot from out of position. Teddy called. As expected, Teddy did not fold. He should continue with almost any two cards when facing a minimum raise, either by calling or re-raising, due to getting 3:1 pot odds. I would generally call with most of my hands that flop reasonably well while re-raising with my premium hands as well as some hands that flop poorly that also have a high card blocker, such as Q-4. The flop came 10 7 6 . Mike checked with his straight. When Mike flops the nuts, his goal should be to get as much money in the pot as possible. This will be difficult to accomplish because of overly

deep stacks. If Mike had no reads on Teddy, he should make a continuation bet of $300 into the $400 pot. A continuation bet guarantees the pot grows while also concealing Mike’s range (assuming he intends to continuation bet most of the time, or with a range of his best made hands and draws). Betting may also induce a bluff-raise from Teddy, allowing a lot of money to go into the pot. That said, Mike apparently knew a lot about Teddy’s strategy, so he checked and… Teddy bet $2,000 into the $400 pot. Seeing how Teddy bet five times the size of the pot, Mike’s check was clearly excellent.

Mike risks his entire bankroll in a game that represents a new beginning. It’s the moment he commits himself to a life of poker.

“You can’t lose what you don’t put in the middle. But you can’t win much either.” — Mike McDermott

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trends

Facing a gigantic flop bet, it’s important to realize that Teddy’s range is almost certainly polarized, meaning he has either a premium hand, such as a straight or three of a kind, or nothing. When he has nothing, he most likely has a draw, including hands like K 9 and 5-4. Since Mike has Teddy either drawing dead or thin, he should call in order to induce additional bluffs on the turn and river. Check-raising the flop is only a good option if Mike can confidently count on Teddy to mindlessly blast his whole stack in. When a wild player is applying immense pressure, the last thing you want to do is raise and give him the chance to get off the hook with all his bluffs. From Teddy’s point of view, the gigantic flop bet makes a lot of sense. Especially on this board, which should generally be better for the pre-flop caller than the pre-flop raiser, a giant bet turns almost all of Mike’s range into bluff catchers. When your opponent is playing for his entire bankroll, he’s not likely to withstand the pressure with less than the nuts once he is put to the test for his entire stack on the river. While I would have bet smaller, perhaps $600 into the $400 pot, the idea of attacking coordinated middle card boards makes a lot of sense. Mike called. The turn was the ( 10 7 6 ) 2 . Mike checked. Mike’s turn check is great. He definitely wants to let his maniacal opponent bluff again. Teddy bet $4,400 into the $4,400 pot. Assuming Teddy wants to try to force Mike off all non-nut hands, he Teddy KGB

should probably bet a bit larger on the turn so that he can realistically go all-in on the river. You will find that your bluffs will typically show more profit if you get more money in the pot on the earlier streets, assuming you can still make a sizable river bet. For example, if Teddy bet $6,000 on the turn instead of $4,400, the pot on the river would be $16,400 instead of $13,200 and the remaining stacks would be $18,800. By betting larger on the turn, Teddy will be able to steal a larger pot on the river while having roughly the same amount of fold equity, given he would still be betting more than the size of the pot. When Teddy bets the size of the pot on the turn, he is likely still polarized to a strong made hand, most likely three of a kind, or a junky draw, most likely a 9, 8, or 5-4. Since Mike still has that range crushed, he does not need to raise either for value or protection. Unless he is confident that Teddy actually has a premium hand, he should call and give Teddy an additional bluffing opportunity on the river. Mike called. The river was the (10 7 6 2 ) A . Mike checked. As on the turn, Mike should certainly check to give Teddy a final opportunity to bluff or value bet a worse made hand. Leading on the river would look as if Mike is afraid to check on the river, fearing Teddy would check behind. Teddy went all-in for $20,400 into the $13,200 pot. Mike called $20,400 with the nuts, doubling his net worth. The way Teddy reacts after Mike’s call with the nuts leads me believe he was bluffing instead of over-valuing a worse made hand. If I were forced to put Teddy on an exact hand, it would be J-8, likely with a backdoor flush draw. This is because J-8 has a draw to the nuts yet it still loses to almost all of Mike’s range. He also has an 8 blocker, making it a bit more difficult for Mike to have 9-8. Of course, his river bluffing range is certainly wider than only J-8, but J-8 (and J-9) are

TELL-TALE TELLS Remember how Teddy KGB delicately deconstructed an Oreo cookie? That’s only in the movies, right? Have you ever run across a pro or high-stakes player with an obvious tell? Unfortunately, most high-level pros don’t give off obvious tells. That’s part of what makes them good. That said, if you pay attention, you can spot them from time to time. I once played in a $5,000 buy-in tournament where I noticed a high-stakes recreational player put his chips into the pot in two different ways. Sometimes he would put in one large stack and other times, he would break the large stack down into five smaller stacks. I paid attention to the hands he revealed at the showdown and it became clear that he used one large stack when he was value betting and five small stacks when he was bluffing. It wasn’t obvious, but it is close enough. Another time I was providing commentary on the final table of a major World Poker Tour event, and the one recreational player there had an incredibly reliable tell. When he had a marginal or weak hand, he put one chip on top of his cards to protect them, and when he had a premium hand he put a stack of 20 chips on top of his cards. Sure enough, one of his opponents picked up on that tell and outplayed him in every single pot. If your opponent makes a hand’s strength obvious, poker becomes an easy game.

prime semi-bluffing candidates due to having blockers and also having a draw to the nuts. Mike played this hand perfectly. He knew his opponent well enough to predict that he could not resist the temptation to run a large bluff on a scary board. This hand beautifully illustrates that if you know your opponent’s tendencies, you can make incredibly exploitative plays (in this case, checking the flop and not raising at any point), allowing you to crush your opponent. “Pay that man,” Teddy says. “Pay that man his money.” Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at pokercoaching.com. @jonathanlittle

Teddy KGB loses his cookies

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FINANCIAL FITNESS

Keto Veto

Debunking the “miracle diet” and going long Starbucks By Dr. Jim Schultz

and the results are amazing!” Well, they really aren’t. About 99% of the keto studies, results, anecdotes or old wives’ tales fail to acknowledge calories. Virtually eliminating an entire macronutrient from one’s diet tends to create a caloric deficit, even after 11 strips of bacon at breakfast and butter-soaked prime rib as a mid-morning snack. The truth is that once calories (and protein) are isolated – like the researchers at Arizona State University did back in 2006 – there’s no difference in fat loss between diets that are high fat-low carb and diets that are moderate fat-moderate carb. Zip. Zilch. Nada. The truth is that keto isn’t magic. It’s math. Eliminating carbs isn’t fairy dust. It’s math. Now some might feel that avoiding bread is shrinking their love handles and that chucking cereal is slimming their waistlines, but those actions aren’t more important than the caloric deficit. Breakups with Sara Lee and General Mills are passengers on the road to Shredsville – not drivers. Not convinced? This is really no different from stepping in and selling the 30 delta put in Starbucks Corp. (SBUX). Investors have about a 70% probability of success on that trade. Period. End of discussion. Ah, Starbucks…it’s an unmatched experience! The baristas have smiles

SBUX 52

stapled to their faces, and the tall latte macchiato with almond milk is bursting with 18,000 milligrams of caffeine for the (un)reasonable price of $8.17. Sure, the Mayo Clinic recommends no more than 400 milligrams daily and the average citizen of Burundi lives on less than $1 a day, but that doesn’t diminish consumers’ enthusiasm for the coffee chain. “Probabilities be damned,” some may be thinking because the pleasurable excesses of Starbucks suggest an inevitable up move. “There’s no way this put loses!” Yes, so many love Starbucks. But the markets are pricing in a 70% success rate on the put. And herein lies the beauty of options. They’re priced to perfection and governed by probabilities. Regardless of how one feels or thinks, the markets offer objective information. They’re true. They’re pure. They’re unbiased. To believe anything else would be akin to thinking that keto possesses special fat-burning properties or extraordinary fat-blasting powers that trump the laws of nature. It’s just not true. Jim Schultz, a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named a North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3

“Keto diet” was the most searched diet of 2018, according to Google Trends

9.1B

the global ketogenic diet food market in 2018

PHOTOGRAPH: SHUTTERSTOCK

nyone whose fitness goals include weight loss, fat loss, a set of sculpted abs, an express ticket to Shredsville or a body transformation so radical their friends won’t recognize them should achieve a caloric deficit. Period. End of discussion. This article could end right there because that statement alone will get people riled up. But let’s press on. Is a caloric deficit the only approach to fitness? No. But is it the first goal to pursue? Absolutely. Some readers may be thinking otherwise. “If I don’t eat carbs all day,” they’re telling themselves, “I’ll be super skinny in days...weeks... minutes!” In fact that’s what Kourtney Kardashian, Thomas Delauer and just about everyone else who’s on the internet blogging or vlogging about fitness would lead the public to believe. With express apologies to the Kardashian family (see pages 10 & 64), that’s not how it works. Legions of YouTubers are promoting a ketogenic diet – a high-fat, adequate-protein, low-carbohydrate regime – that forces the body to burn fats instead of carbohydrates. Most call it keto. But doing, going, embracing, enduring or surviving keto doesn’t magically set body fat on fire. It’s not some witches brew that’ll zap blubber into a bubbling cauldron. Some might reply, “I Google it,

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trends

CALENDAR

ASTRO OUTLOOK If the economic expansion wanes, blame Jupiter squaring Neptune By Susan Abbott Gidel

PHOTOGRAPHS AND ILLUSTRATIONS: SHUTTERSTOCK

ext month, the economic expansion that began in June 2009 will tie the record-holder at 120 months (March 1991-March 2001). Itâ&#x20AC;&#x2122;s happening simultaneously with an astrological pattern that signals a potential end to economic expansion, but the dominance of the planet Neptuneâ&#x20AC;&#x201D;king of fogginess and delusionâ&#x20AC;&#x201D;may make the change difficult to recognize. True bear markets in stocks occur during recession, so itâ&#x20AC;&#x2122;s good to be on the lookout for a potential high in the S&P 500. In June, three days have astrological connections that could point to highsâ&#x20AC;&#x201D;June 12, June 21 and June 26. However, June 21 is by far the heavy favorite. Hereâ&#x20AC;&#x2122;s why: The summer solstice occurs at 11:54 a.m. (Eastern), and is one of 10 days each year that legendary trader and financial astrologer W.D. Gann marked for a potential trend change. The planet Neptune turns retrograde in motion at 10:36 a.m. (Eastern), which can signal a trend change in crude oil. It is quadruple witching day, with quarterly expirations in stock index futures, stock index options, stock options and stock futures. It is two days after the Fed releases its regular meeting announcement as well as its quarterly economic forecast. It is five days after an exact square between Jupiter and Neptune. Jupiter square Neptune is the featured aspect that points to the expansionâ&#x20AC;&#x2122;s potential end. When this pair is at a 90-degree angle in the sky, expansion struggles as inflation, interest rates and energy prices can feel upward pressure. This year, Jupiter squares Neptune exactly on Jan. 13, June 16 and Sept. 21. Susan Abbott Gidel, author of Trading In Sync With Commodities â&#x20AC;&#x201C; Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter.

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techniques essential trading strategies

BASIC

Going Long You are bullish on a stock or sector. You see upside ahead. It’s important to understand the probabilities, risks and costs of the various options. By Anton Kulikov

n the complex world of financial instruments, investors have many ways to express bullish assumptions. Here are some ways to get long a particular underlying. This article won’t delve into the complexities of those strategies. Instead, let’s compare them. Many strategies share the same directional bias but vary drastically by other metrics. Investors should choose a strategy that fits their criteria and account size. Some notes: Exposure is simply how high the potential is for risk and for reward. That’s usually measured in share equivalents, meaning that the more shares investors have, the more they can make or lose. Probability of profit (POP) is the chance that the position yields at least $0.01 in profit by expiration. Stocks always have a POP of 50%. In “Metrics for Disney, right, we show an example of the various long strategies, and their associated metrics, for Disney (DIS). There are many ways to go long other than just buying stock. One can adjust their share exposure and probability of profit to suit their needs. If you want a strategy that requires low buying power and a high probability of profit, the short put spread is the way to go. Even the simple strategy of buying stock can be replicated using only half the capital with the combo. Incorporating options into your trading can increase your probability of success while limiting capital and risk exposure. Anton Kulikov is a trader, data scientist and research analyst at tastytrade.

Strategy Basics Strategy

Mechanics

Long Stock

Buy shares of stock

Short Put

Sell one put out-of-the-money

Long Call Spread

Buy the first in-the-money call, sell the first out-of-the-money call

Long Call

Buy one call out-of-the-money

Short Put Spread

Sell a put out-of-the-money, buy a put further out-of-the-money

Combo

Buy one call, sell one put, both at the same strike price

Strategies explained Strategy

Capital Required

Exposure

Probability of Profit

Long Stock

High

Moderate

Short Put

Moderate

High

Long Call Spread*

Low

Moderate

Long Call

Low

Moderate

Low

Short Put Spread

Low

High

Combo

Moderate

High

Moderate *at-the-money

Metrics for Disney This table is an example of various long strategies, and their associated metrics, for Disney (DIS). Note: The numbers change with the market (This was created March 15, 2019.) Strategy

Capital Required

Share Exposure

Probability of Profit

Long Stock (100)

$5772

100

50%

Short Put

$1809

76%

Long Call Spread*

$340

51%

Long Call

$120

21%

Short Put Spread

$415

71%

Combo

$2554

100

50%

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BY 1893 INSPIRED

F E W H A S T H E S P I C E . H A N D - M A D E I N S M A L L B ATC H E S, U S I N G A M A S H-B I L L INSPIRED BY WHISKEY â&#x20AC;&#x2122;S PRE-PROHIBITION GOLDEN ERA. F E W COMBINES A HIGH RYE CONTENT & PEPPERY YE A ST TO MAKE A UNIQUELY SPIC Y BOURBON.

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techniques

INTERMEDIATE

Probability of Profit To illustrate an essential trading concept for active investors, luckbox serves up POP with Netflix By Mike Butler

ne poker player bluffs his way to a jackpot with a pair of deuces, while another folds because he doesn’t have at least a straight. Their strategies diverge because the first player’s acting on instinct and the second’s playing the odds – but neither can escape the probabilities. It’s the same in the world of options trading. Some investors spend time analyzing an entry point and then execute a trade that reflects their assumption. Others trade off of instinct or hunches. What’s interesting is that two investors can feel bullish about a stock like Netflix (Netflix) but have completely different trades and probabilities of success. That breadth of possibility seduces some into a life of trading. So once they’re hooked, how can traders use probabilities to make intelligent trading decisions? First, they should understand that the probability of profit (POP) for a trade or strategy means the probability of making at least $0.01 on that trade by a specific date in the future, such as an option’s expiration. Profit and loss can and will fluctuate daily, but the POP of a given trade at expiration can be estimated based on current implied volatility levels, how many days remain until expiration and how much extrinsic value is associated with that trade. But before diving into that idea, consider how POP is calculated. The math behind POP In the simplest terms, probability of profit is an extension of the probability of an option expiring in-the-money

(ITM) or out-of-the-money (OTM). For short-option trades, POP will be greater than the probability of that option expiring OTM. For long-option trades, POP will be less than the probability of that option expiring ITM. The reason is the option’s extrinsic value. Extrinsic value is the portion of an option’s value that’s tied to time and volatility. It’s separate from intrinsic value, which is based on where the stock price is relative to the option’s strike price. The value of an out-ofthe-money option is 100% extrinsic. Extrinsic value will be $0.00 at expiration, and the profit or loss of an option trade will be determined by whether or not it has intrinsic value at expiration. Short-option sellers want their options to have zero intrinsic value at expiration, and long-option buyers want as much intrinsic value as possible at expiration. Keeping that in mind, the discussion can turn to how probabilities start to unfold through the lens of extrinsic value.

falling below their strike of $320, where they would be obligated to purchase 100 shares at expiration. This credit is 100% extrinsic value at this point because Netflix is trading at around $357 per share and the strike is at $320 — it’s OTM. The probability of that option expiring OTM is 76% in this expiration cycle, but the probability of profit is actually higher than that at around 81%. (See “Extrinsic value,” page 58). Why? The answer has to do with extrinsic value. The green profit zone on the tastyworks curve view doesn’t turn into a red loss zone until the $313.90 mark. That’s because the trader would have already collected $6.10 to open the trade, and that

The probability of profit (POP) is defined as the chance of making at least $0.01 on a trade by a specific date

Short-option sellers Short sellers of option contracts benefit if the option expires OTM (which is completely opposite of long buyers of option contracts). The short seller keeps the credit received up front for taking on the risk — after all, the short seller has more theoretical adverse risk than the option buyer. If traders feel bullish on Netflix and decide to sell a put at the 320 strike, they would collect a $6.10 credit for taking the risk of the stock

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credit can be used to offset intrinsic value losses at expiration if Netflix is below $320. If Netflix were at $313.90 at the option’s expiration, the trader would be at breakeven on the trade (no loss or profit) because the option’s intrinsic value ($6.10) equals the credit received ($6.10). Going back to the definition of POP, which is the probability of making at least $0.01 on the trade, it becomes clear why POP is a higher number than the probability of the strike expiring OTM. Because the trader collected an extrinsic value credit to open the trade, that value can be used to offset losses past the strike price to a point. The breakeven point of the trade ($313.90) is further away from the option’s strike price ($320). It’s less likely for Netflix to drop below $313.90 than it is for the stock to drop below $320. Because of that, POP is higher than the strike expiring OTM for short option sellers, as that $0.01 profit point is below the strike in this example, at $313.9. In other words, short OTM option sellers can see profit at expiration even if the strike is ITM. This extrinsic value credit can do wonders for probabilities of success and can be thought of as a defensive mechanism just as much as an offensive mechanism. After that crash course on why POP is higher than the probability of a short-option expiring OTM, the class can turn their attention to long options. Can extrinsic value help traders in the same way at expira-tion? Unfortunately, when buying options in most cases, the answer is a resounding “No!” Long-option buyers When buying an option to open for a debit, traders benefit most if the option expires ITM by more than they paid for the option initially. If that happens, the trader can sell the option for a larger credit than the debit they paid for it, and realize a profit.

The chart in "Bullish on Netflix," page 59, shows in traders are bullish on Netflix and decide to

Extrinsic value The green profit zone on the curve doesn’t turn into a red loss zone until the $313.90 mark.

Two investors can feel bullish about a stock like Netflix but have completely different trades and probabilities of success

buy a call at the 360 strike, they would pay an $18.90 debit for the right to buy shares at $360 at the option’s expiration. That debit is 100% extrinsic value at that point because Netflix is trading just under $360 per share and the strike is at $360. That’s not good for the trader at expiration because, as the image indicates, the green profit zone doesn’t begin until the $378.91 mark. If traders pay $18.90 for the contract, Netflix must be above the $360 strike by at least $18.91 at expiration for the trader to realize a profit. So, $378.90 is, as many read-ers will have guessed, the breakeven price of that long call. The probability of that option expiring ITM is 47%, but the probability of profit is much lower than that at around 32%. Because the option must be significantly ITM for the trade to be at least $0.01 profitable, the trader wants the

stock price of Netflix to move much higher. It’s harder for Netflix to rise above $378.90 than it is for it to rise above $360. Typically, when a big movement is needed in a specific direction in a short time, probabil-ities start to decline. So what can a trader do, if anything, to mitigate the low probability of success at expiration associated with buying at-the-money (ATM) options? The answer has to do with extrinsic value, yet again. Dealing with extrinsic value Based on what’s been covered so far, it’s clear that paying for extrin-sic value in a long option isn’t ideal if traders are holding the option to expiration. On the other hand, collecting extrinsic value in a short option can make the difference between profit and loss if the trader’s holding the option to expiration. If traders tie this together

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Bullish on Netflix A trader who buys a call at the 360 strike would pay an $18.90 debit for the right to buy shares at $360 at the option’s expiration.

with POP, they should make the most of extrinsic value when selling options, and pay as little as possible when buying options. In a high implied volatility (IV) environment, extrinsic value could be higher than normal, and in a low IV environment, extrinsic value could be low. At the end of the day, implied volatility is directly related to extrinsic value because IV is derived from current option prices. For short-option sellers, the tactic is easy to see — the more premium traders can collect up front for selling the option, the better off they will be in terms of breakeven prices

and POP. That might mean sticking it out and waiting patiently for high IV. What this means for long-option buyers is paying more attention to the setup of the trade, rather than the environment. Even in a low IV environment, when extrinsic value is lower, there’s still a staggering difference in POP between a long ATM option and a long ITM option — take a look at the Netflix example in “Low IV,” page 60, to see why. In that image, the trader is buying the $300 strike call instead of the $360 strike call. Yes, the option will be more expensive overall

because it’s now ITM, but does that make it a higher-probability trade compared with the $360 strike call? The answer is yes, based on extrinsic value. When buying the 360 strike call, the trader would have paid around $18.90 in extrinsic value to own the option. Netflix would have to climb to $378.90 by expiration just for the trader to break even. Buying the $300 strike call, the trader is paying $62.50 for the option, which has only $3.65 of extrinsic value. That’s because the option has $58.85 of intrinsic value with Netflix at $358.85. Because traders can maintain all of that

NFLX

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techniques

Low IV Even in a low IV environment, when extrinsic value is lower, there’s still a staggering difference in POP between a long at-the-money option and a long in-the-money option.

intrinsic value if the stock stays at the same price, they no longer need for the stock to move up as much to be profitable on the trade at expiration. Long-option buyers only need to make up for the extrinsic value they pay for the option to be profitable at expiration, and in this case it’s about 80% less extrinsic value than the $360 strike call. That’s clearly reflected in the difference in POP, which increases to 45%. Netflix only has to rise to $362.51 at expiration for this trade to be profitable,

compared to $378.91 in the earlier example. And it’s easier for Netflix to rise above $362.50 than for it to rise above $378.90. The probability of Netflix landing at or above $362.50 at expiration is around 45%, and the probability of Netflix expiring at or above $378.90 is around 32%. Extrapolate that over a large number of occurrences, and the difference in potential success becomes huge. Remember that options traders take risks with the objective of turn-

ing a profit. Regardless of how they arrive at a directional or neutral assumption, they should approach it in a methodical and intelligent way. For long-option buyers, that could mean minimizing extrinsic value as much as possible. For short-option sellers, that could mean maximizing it. After all, it could make the difference between profit and loss at expiration. Mike Butler, a self-taught trader, serves as host of Mike and his White Board and co-host of Market Mindset on the tastytrade network. @tastytraderMike

More on POP with Mike and his White Board

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luckboxmagazine.com 10 Issues for only the control freakâ&#x20AC;&#x2122;s guide to life, money & probability 1905-techniques-intermediate.indd 61

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techniques

ADVANCED

The Short Put The moving parts of a short put have scared off many investors. Let’s clear up misconceptions so traders can take advantage of the benefits By Anton Kulikov

That provides the $46.50 breakeven price; below that price is where the short put loses money, while above that price is the point where it can make money. Compare that with 100 shares of stock that make money only if the stock goes up. That’s because the breakeven for the stock price is its purchase price of $50. In this case, if the stock drops to

$49, the long shares of XYZ lose $100. But the short $50 put can still be profitable with the stock at $49 at expiration because $49 is higher than the put’s $46.50 breakeven price. That illustrates a main advantage of a short put. There are more ways the stock could move and still make a profit. But some readers might say a short put carries more risk than

No, that’s not Jim Carrey and he’s not executing a short put. It’s Norway’s Martin Roe in action during the 2019 European Indoor Athletics Championships in Glasgow, Scotland.

PHOTOGRAPH: REUTERS/ANDREW BOYERS

ometimes investors feel certain a stock won’t go down but aren’t very bullish on it. That’s when it’s time for a short put. A short put is a bullish strategy that profits if the underlying moves up. However, a stock’s movement isn’t the only variable that affects a short put. In fact, a short-put trader should pay attention to changes in implied volatility, changes in directional exposure, time decay and the date of expiration. Keeping track of all of those metrics can seem daunting at first, but over time investors find that the short put becomes one of the most versatile strategies in the toolkit, especially in periods of high implied volatility. To visualize the difference between buying stock and shorting a put, take a look at “Payoff diagram,” page 63, which shows a diagram for a short put at expiration compared to long stock. Take, for example, stock XYZ, which is trading at $50. An investor can sell a $50 put for $3.50, netting a total credit of $350. So, what happens then? Well, one of five things can occur by expiration: the stock goes up a lot, goes up a little, goes sideways, goes down a little or goes down a lot. Investors profit in four of the five ways. The only way they take a loss is if the stock goes below $46.50—that’s the scenario where the stock price goes down a lot (at least 7% in this case, which is the breakeven price for that put). How is that calculated? Just take the strike price of the put ($50) and subract the price of the put ($3.50).

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techniques

long stock! That’s just not true. Suppose the worst happens to XYZ, and it goes to $0. Kaput. The short put would lose its breakeven price, $4,650. The long 100 shares would lose $5,000. Both losses stink, but which is riskier? The long stock. Remember all the other metrics that affect a short put? Investors can make all of them work to their advantage. Ideally, they would sell a short put when implied volatility (IV) is high. The reason? Because short puts have negative vega. That means that when the IV goes down, the price of the put also goes down (good for short puts!). So why wait until the IV is high to sell it? Volatility tends to be mean reverting, meaning that if it goes up a lot it has a pretty good chance of coming back down, such as reverting to its mean or average. What about time decay? Well, another advantage of the short put over long stock is the benefit of positive theta. Positive theta is how much profit investors realize at the end of each trading day on

a short put (or any option, for that matter) if nothing else changes. All short puts come with some value of positive theta. Another great aspect of this strategy is that even though an investor sold the put on 100 shares of stock, they start off with only 50 shares of exposure. That’s the delta of the short put. That reduces risk to the downside if the stock does move against the investor. To recap the benefits: Investors lose only if the stock price goes down significantly by expiration. Investors can claim early profits if implied volatility declines. Investors have paid every day just for holding the position. Initially, there’s less exposure to the stock than being long 100 shares. At this point, some readers will be thinking, “What’s the catch?” There are two. One, if the stock has a big move up, the profit on the short put

Stocks can gain a little, gain a lot, stay the same, lose a little or lose a lot. In four or those five scenarios, a short put makes money is limited to the credit received when the investor shorts it. The stock can make more money if that happens. Two, the long stock is eligible to receive any dividends, while the short put is not. However, the price of the short put reflects the stock’s dividend and is higher because of it. Finally, it can seem like there’s a lot to juggle with short puts. But don’t overthink it. It’s a less risky and more flexible alternative to a long stock position. So when feeling bullish on a stock, consider a short put instead of buying shares. It could become a mainstay of an investment strategy. Anton Kulikov is a trader, data scientist and research analyst at tastytrade.

Payoff diagram To visualize the difference between buying stock and shorting a put, check out this payoff diagram for a short put at expiration compared to long stock.

A short put will make money unless the stock drops more than 7%.

Long stock will make money only if the stock goes up from its purchase price.

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luckbox of the month

KYLIE JENNER: SELFIE-MADE MAKEUP MOGUL with skepticism. Like luckbox, Peck can’t swallow the idea that Jenner’s self-made. “The value of her makeup company lies in the celebrity she accrued via her family,” Peck wrote. Writer Carley Ledbetter took a similar stance on the Entertainment website. “She comes from money and connections,” Ledbetter maintained. Jenner was showered with luck from the moment she was born, growing up surrounded by celebrities in one of the nation’s wealthiest ZIP codes. For parents, she had TV personality Kris Jenner and 1976 Summer Olympics decathlon winner Bruce Jenner, now known as Caitlyn Jenner. Her mother’s first husband, attorney Robert Kardashian, was himself an infamous luckbox. A half-sister, Kim Kardashian, palled around with heiress Paris Hilton and married rapper Kanye West. As a member of the JennerKardashian clan, Jenner became a reality TV star at age 10 on the E! series Keeping Up with the Kardashians. So anyone breathing the air in Jenner’s childhood haunts was inhaling the very essence of success. Those vapors weren’t wasted on her, either. By the time Jenner was 14, she and her sister were hawing a clothing line called “Kendall & Kylie.” Kylie Lip Kits debuted the next year, and the name was later changed to Kylie Cosmetics. The

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startup got a valuable boost from Seed Beauty, and about that time Jenner’s mobile app reached No. 1 on the iTunes App Store. In both 2014 and 2015, Time magazine named the Jenner sisters to their list of the most influential teens in the world. In 2017, Jenner became the youngest person ever to make the Forbes Celebrity 100 list. By 2018, Jenner became one of the Top 10 most-followed people on Instagram with more than 122 million followers. By 2017, Jenner starred on her own spin-off TV series, Life of Kylie. Last year, the New York Post celebrated her as the most influential celebrity in the fashion industry. Now, she’s on that Forbes billionaires list. Can we attribute all this to intellectual acumen? Not likely. Jenner recently tweeted about chemtrails, the debunked 1990s conspiracy theory that jet engines are poisoning all life on earth. So the luckbox editors feel justified in concluding that luck played an undeniable role in Jenner’s ascension to the billionaires club. That’s why she’s luckbox of the month.

“I take, like, two selfies to get the one I like.”

“If I post the wrong selfie, then I’m like, ‘Ugh, that other selfie was so much better than that selfie,’ but other than that I really don’t regret anything.”

PHOTOGRAPH: REUTERS/ANDREW KELLY

ust a month ago, the editors of luckbox predicted no one would break Facebook CEO Mark Zuckerberg’s record of becoming the world’s youngest self-made billionaire at age 23 – at least not for a long time. It was one of the reasons we named Zuckerberg luckbox of the month for April. Almost immediately after that the press began proclaiming that Kylie Jenner had smashed Zuck’s record – beating him by roughly two years at age 21. But did she? Maybe luckbox – which is predicated on leveraging probability – wasn’t entirely wrong. We’re not saying Jenner’s not worth 10 figures.That’s not for us to decide. We’re just saying she’s not self-made. After all, Jenner’s been unbelievably lucky – so lucky, in fact, that she’s earned the title of luckbox of the month for May. Jenner claims otherwise when it comes to luck, saying she started her Kylie Cosmetics goldmine with money she made as a model, not with cash anybody handed her. That explanation satisfied Forbes magazine, which christened her the youngest self-made billionaire ever. The princess of lip kits made the Forbes list of billionaires soon after she signed a deal to feature her $29 kits in Ulta’s more than 1,000 stores. Until then, Jenner had flogged her wares online and in mall pop-ups. But some observers, including HuffPost writer Emily Peck, greeted the Forbes proclamation

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We sensed that some of Kylie Jenner’s millions of followers won’t agree that she deserves the title of luckbox of the month. So here’s Mike Speer of Michaels Wilder to profer another perspective.

PHOTOGRAPHS: (MAGZINE) FORBES; (SOCIAL MEDIA) INSTAGRAM

ylie Jenner had amassed wealth of approximately $5 million by 2015, when she turned 18. In the nearly four years since then, her net worth has skyrocketed to $1 billion, making her the youngest billionaire in the world. That’s a 19,900% increase. OK, so Jenner came from a rich family and started with advantages the rest of us could only dream about. But why isn’t every Kardashian/Jenner worth $1 billion? The next top earner in the family, Jenner’s half-sister Kim Kardashian West, has assets valued at $350 million – less than half of Jenner’s worth. Kendall Jenner, the sibling closest to Jenner in age and a collaborator with Jenner on brand deals, is worth $30 million. Jenner, the youngest member of the family, has made more than all her sisters combined. How Kylie made money The Kardashian clan made their TV debut in 2007 with Keeping Up with the Kardashians. Jenner was 9 years old (or 10 by some accounts) when the show premiered. By 2014, she was making a reported $500,000 per episode. That’s a lot of money, but it’s nowhere near $1 billion. At age 11, Jenner made

Kylie Cosmetics is valued at $900 million. Adding the cash Jenner’s earned since 2015, her fortune comes to $1 billion, making the 21-year-old the youngest self-made billionaire. – Forbes magazine

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$100,000 on an endorsement deal for Kardashian-themed nail polish. Since then, she’s modeled and endorsed brands like Puma and Topshop. If that weren’t enough, Jenner also appears in her own mobile game, is listed as an author of a young adult novel and launched an app that convinces users to pay $3 a month for exclusive content from her everyday life. Those endorsements, collaborations and appearances paid off in 2015 when Jenner took the social media crown, claiming the top spot on Snapchat as its mostviewed account and making the Top 10 list of most popular accounts on Instagram. She was differentiating herself from the rest of the family and building her own brand. Most of Jenner’s $1 billion comes from her company Kylie Cosmetics, which she began by investing $250,000. She leveraged her following to launch the hugely successful makeup brand in an already-saturated market. The day she launched the company her lip products sold out in less than a minute. Yes, Jenner did hit the jackpot in the lottery of birth, but she could have just as easily have settled for her $500,000 per episode salary and left it at that. Instead, Jenner has been working to build her brand since before she finished high school. She’s amassed a following that’s larger than that of most countries. She’s a model, author, businesswoman, taste-maker, fashion designer, makeup artist and mother. Branding and social media Jenner has been shrewd about building her business. Take the Kylie Cosmetics line, for example. It’s an open secret among makeup

lovers that her formulations seem suspiciously similar to those of the wallet-friendly brand Colourpop. Both brands are manufactured by the same company, Seed Beauty. What a coincidence! Kylie Cosmetics and Colourpop sell basically the same product. Besides the branding, the only difference is price. A Colourpop’s lipstick costs $6.50, while Jenner’s brand costs $16, making it about 2.5 times more expensive. Why can she charge so much? One word: Branding. Jenner’s worked hard to bolster a brand that most digital marketers can only dream about. She has direct access to more than 128 million people’s Instagram feeds, and countless people set out to copy her aesthetic choices – from her body-conscious fashion style to her funky hair colors and even her famously plumped lips. Her life is her brand. Social media provides a level playing field, giving everyone a chance to cultivate brands and show them to the world. Does having a famous family help? Yup. Is it necessary for success? Not at all. Life is what you make of it. Mike Speer is the chief marketing officer at Michaels Wilder, a digital marketing agency. @RealMikeSpeer

Millions of Kylie Jenner fans can’t be wrong — right?

luckbox readers…we’d like to know what you think. The $1 billion aside, is Kylie Jenner deserving of the “self-made” label that Forbes bestowed upon her? Is she a born luckbox or a born leader? Please weigh in on our first readers’ survey. Your comments may be published in the next issue of luckbox! Print readers may use the Thyng app or visit luckboxmagazine.com/ survey. Digital readers can click this page.

vote on luckbox of the month & take our first reader survey

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