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E r N wa ZI a A sign AG de M l& a EW ri N ito T ed ES er B oth
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life. money. probability.
ds
JUNE 2020
NEW ORDER THE
The Inevitable End of Amazon
Buck Buffett— Buy This Airline
Will we recognize the face of airlines when the masks come off?
Gaming Stocks Keep Leveling Up
Quarantine Vices— Booze, Weed & Porn
the control freak's guide to life, money & probability
june 2020
p. 12
14 Grounded Until Further Notice
20 An Uncertain Future for Airports
24 Video Gaming Just Keeps Growing
16 Air Travel Will Shrink to Adapt
22 Southwest Airlines: A Lot to LUV
28 Teddy Bear Correction or a 21st Century Depression?
Will America’s air carriers ever regain their lost glory and profitability? Experts offer a resounding “maybe.”
An aviation industry veteran explains how every aspect of air travel could be smaller at the other end of the pandemic.
2
Aviation industry expert Stephen Van Beek outlines a two-part recovery plan for the nation’s airports.
With plenty of cash and relatively low expenses, Southwest’s profits and stock prices appear likely to take off when air travel recovers.
The audience for video gaming is expanding even more quickly than usual during the pandemic-induced lockdown.
Since the crash of 1987, every bear market has been accompanied by an economic downturn.
31 Amazon: Not Too Big to Fail
Tom Sosnoff and Jeff Bezos both say mighty Amazon will someday sputter and die. The difference is Bezos says it only to seem “real,” while Sosnoff’s review of recent history suggests the demise is almost inevitable.
PHOTOGRAPH: REUTERS/CARLOS BARRIA
The New Order
A pilot traverses a nearly empty terminal at Washington’s Reagan International Airport as COVID-19 maintains its grip on the transportation system.
luckbox | june 2020
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editor-in-chief ed mckinley managing editor yesenia duran assistant editor mike reddy technical editor mike rechenthin British artist Luke Jerram created this beautiful glass coronavirus sculpture.
P. 36
trends
trades
tactics
life, luxury & the pursuit of happiness
actionable trading ideas
essential trading strategies
DIVERSIONS
OPTIONS
BASIC
NORMAL DEVIATE
36 When Models Fail
THE POLITICAL TRADE
38 5% Growth? Bet on it.
FINANCIAL FITNESS
40 Fit for COVID
47 Your Thinking Must be Skewed FUTURES
50 Less Than Zero
CHERRY PICKS
42 Essential Tips for Online Poker
55 When Airline Stocks Resume Flight
TRADER
44 Meet Michael Rechenthin 45 Triple Eclipses & Quadruple Witches
contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com
59 This is No Amazon Delivery
advertising inquiries advertise@luckboxmagazine.com subscriptions & service service@luckboxmagazine.com
INTERMEDIATE
60 Here Are Some ETFs to Avoid
media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com
ADVANCED
62 Leg Up on Futures Calendar Spreading
DO DILIGENCE
56 The Art of Sector Selection
Luckbox magazine, a tastytrade publication, is published at 19 n. Sangamon, Chicago, IL 60607
CHEAT SHEET
ISSN: 2689-5692
63 Delta Force
Printed at Lane Press in Vermont luckboxmagazine.com
FAKE FINANCIAL NEWS
10 No Substitute For Actual Teaching
CALENDAR
editorial director jeff joseph
Editorial offices: 312.761.4218
POKER
contributing photographer garrett roodbergen
comments, tips & story ideas feedback@luckboxmagazine.com
THE TECHNICIAN
52 Technically Speaking, the Future Doesn’t Look Bright
creative director jacqueline cantu
Luckbox magazine
LUCKBOX OF THE MONTH
@luckboxmag
64 Virus-Free Voyaging
On the cover: Illustration by Andrew R. Davis
2019 Best New Magazine Folio Award for Custom Content
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!
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PHOTOGRAPH: LUKE JERRAM/COVER IMAGES VIA REUTERS
33 Drunk, High & Horny
contributing editors vonetta logan, tom preston
luckbox | june 2020
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PANDEMIC MYTHS & MEMES The spheres are in commotion The elements in harmony She blinded me with science And hit me with technology —She Blinded Me With Science, Thomas Dolby (1982)
Call us jaded, but we feel compelled to protest the excessive use and abuse of myths, memes and tropes by media, marketers and politicians—particularly during the pandemic. “We’re all in this together.” This cringeworthy sentiment from the solidarity anthem in Disney’s 2006 High School Musical quickly grew tiresome. What’s more, the mantra fails as an expression of empathy. Cultural, geographic and income inequality ensures that Americans experience the pandemic and quarantine in vastly different ways. Frontline healthcare workers don’t feel they’re “in this together” with Zoomenabled tech-firm employees (semi-)working from home. The masked-and-gloved Instacart grocery delivery driver doesn’t feel connected with the marketing pro answering the door in his shorts. The single parent unable to work a salon or restaurant job feels little in common with a teacher who presents lessons online and continues to receive a paycheck. Practically overnight, some 36 million Americans are unemployed. At best, the statement sounds trite and doesn’t ring true. At worst, it shows disrespect for the plight of the less-privileged. “Follow the science.” This politicized pontification pops up everywhere—from virtue-signaling lawn signs to speeches by pandemic-pandering politicians. “Following science” requires an understanding of its limitations. Science seldom delivers just one conclusion. To the
contrary, scientists have created conflicting models and presented differing views throughout the pandemic—for the simple reason that it’s a novel coronavirus. By definition, it’s a new coronavirus that did not previously exist. But deadlines loom and the news cycle never rests. So, talking heads, health officials and politicians continue to invoke the authority of science. But was Los Angeles Mayor Eric Garcetti scientific when he required face coverings on golf courses? Was Michigan Gov. Gretchen Whitmer making sense when she outlawed lawn mowing and motorboating? Did the World Health Organization follow science when it declared in January that it “found no clear evidence” of human-to-human transfer? What was Dr. Anthony Fauci thinking when he condoned Tinder hookups? And what should we say about President Donald Trump suggesting Americans ingest or inject bleach to combat the virus? Even if the COVID-19 science were certain—and it’s not—politicians should not indiscriminately follow scientists during a pandemic any more than they should blindly follow economists during an economic crisis. The incomplete science available in the early stages of a rapidly evolving pandemic should not dictate public policy—that’s for the people and their elected representatives to decide. Alex Berezo, a microbiologist who debunks junk science for the American Council on Science and Health, puts it this way: “The science on marijuana ... is clear. It’s bad for you. But a ban doesn’t make legal or financial sense, which is why ‘the science’
Two ways to send comments, criticism and suggestions to Luckbox
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was overruled in favor of legalization in many states. The bottom line is that there are very few, if any, issues in which science is the only relevant factor.” The relationships are intricate among science, governance, liberty, safety and public policy. Following what scientists say when confirmed science is scarce about a new virus ultimately devalues science in general. “New normal.” Which brings us to the latest Luckbox. An internet search for “new normal after coronavirus” yields more than two billion results. That’s a lot of feckless forecasting. In a Gallup poll after the 9/11 terrorist attacks, 63% of Americans felt certain the world would never return to the way it was. They were right, but for the wrong reason. Everything is always changing, and these days globalization and technology are speeding up the process. Still, life did return to “normal.” Americans fly on planes, work in skyscrapers, attend arena-sized events and eat in restaurants—as they most certainly will again, post-pandemic. As Luckbox examines what lies ahead for certain economically sensitive industries— like the airlines—the editorial team is sworn to avoid the overused phrase “new normal.” Call it “The New Order” instead. If the offending phrase somehow slips into the issue, let us know. After all, we’re all in this together. Ed McKinley editor-in-chief
Email feedback@luckboxmagazine.com
Jeff Joseph editorial director
Visit luckboxmagazine.com/survey
luckbox | june 2020
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Luckbox Reader Survey
We poll the readers every issue. Here are some recent responses. How likely are you to participate in the following activities before Aug. 1, 2020? Rank 1 (no way)–10 (very likely)
Has your level of stress increased during the pandemic?
Air, bus or train travel............................. 3.9
Yes................................. 50%
Eat at a sit-down restaurant...................6.0
No.................................... 11%
Wear a mask and/or gloves in hightraffic public places and retail stores.... 7.4
About the same............. 39%
HELP WITH THE NEXT ISSUE! Please take the reader poll at luckboxmagazine.com/survey
Open Outcry I don’t like all the talk about the “new normal.” It’s all wild speculation by the same talking heads who interpret events in ways that allow them to profit from spreading panic and misinformation. Sure masks and gloves will be the order of the day for a while, but I think that in the long term fear of the virus will subside. Luckbox is a fascinating publication. I like the content that looks at news and information with a completely different viewpoint and tackles unusual questions about risk, reward and probabilities. It’s kind of like a monthly version of Freakanomics! —John LaBonney, Las Vegas I read Luckbox cover-to-cover yesterday, and it gave me the pleasure of reading a magazine that I haven’t felt since my college days of reading Rolling Stone religiously or even Vanity Fair when Tina Brown was editor. It’s truly awesome— from hand feel to graphic design
to the single-topic focus to, most importantly, the writing. Very, very well done! —David Morton, Evanston, IL I enjoyed the health tips in the How Not To Die issue and was excited to share them with my family. —Gary Christie, Ontario The How Not to Die issue seems biased in favor of a plant-based diet, in particular Michael Greger’s viewpoint. It would have been more useful for the readers to have a balance approach, including views from Dr. Shawn Baker, who debunked Greger’s claims, or Dr. Ken Berry, Dr. Paul Saladino, or Dr. Georgia Ede. Do you get my point? They are all advocates of a carnivore diet. —Luis Neira, Location withheld Thanks Luis. Luckbox looked carefully at the evidence Dr. Greger provides and concurred with his
findings. Moreover, his non-dogmatic perspective makes his advice easy to follow. “I don’t advocate for a vegetarian or vegan diet,” Dr. Greger says. “[the evidence suggests] the more whole plant foods we eat, the better.” But we asked Dr. Greger to reply directly. Here is his response: “Carnivore dieters are the flatearthers of the nutrition world, but unlike all-meat diets, believing the Earth is flat isn’t going to kill anyone. Like anti-vaxxers and climate-change deniers, balking at the scientific consensus can sometimes be harmful to your health. The True Health Initiative has gathered hundreds of the top nutrition scientists in the world to agree upon a consensus statement as to the healthiest diet for human beings and has concluded that we should eat diets mostly composed of minimally processed plant foods.” —Dr. Michael Greger, M.D. FACLM
“Adventist Health’s work with Blue Zones represents the future of healthcare and is a major component of our plan to redefine the role of health organizations across America” —Scott Reiner, Adventist Health CEO, in announcing the April acquisition of Blue Zones, which was featured in the (May) How Not to Die issue of Luckbox.
Thinking Inside the Luckbox Luckbox is dedicated to helping hard-working, active investors achieve skill-derived, outlier results. How? Check out the following tips: 1 Tune out the noise and false prophets in the investment world and take control.
2006-OpenOutcry.indd 7
2 Probability is the key to improving outcomes in the markets and in life.
3 Timely investment themes, sectors and stocks matter only because they tend to produce greater volatility.
4 Greater volatility brings greater opportunity.
5 Options are the best vehicle to manage risk and exploit market volatility.
6 Don’t rely on luck—know your options—luck smiles upon the prepared.
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SHORT INTEREST
NEW ORDER
“The big thing we have to avoid … is a second wave of the virus. But if we do, then the economy can continue to recover. We’ll see GDP move back up after the very low numbers of this quarter.” SEE PAGE 38
2X
Nintendo Switch video game console sales more than doubled in March year-overyear.
SEE PAGE 24
Source: The NPD Group
—Jerome Powell, Federal Reserve Chairman
8
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SEE PAGE 31
“Day Two is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day One.” —Jeff Bezos on his “Day One” philosophy, 2017 letter to shareholders
1,Coronavirus100 themed videos have been uploaded to Pornhub with over 1 million views Source: Pornhub Insights
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SEE PAGE 33
15,500 airplanes (60% of commercial aircraft) have been grounded as a result of the COVID-19 pandemic SEE PAGE 22
Source: Cirium
WHAT IS THIS THYNG? Take the reader survey. Luckbox may publish your comments!
THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.
1 Download the free THYNG app
2 Select the “Targets” mode, scan any Luckbox page that contains the THYNG icon
3 Watch the page come to life with enhanced content!
5/21/20 11:30 AM
FAKE FINANCIAL NEWS
No Substitute For Actual Teaching Higher education is moving online, but can that replace the richness of college life? By Vonetta Logan
M
ost of life falls short of what’s portrayed in the movies. Kissing in the rain? The future bride and groom will both catch pneumonia and their blowout wedding reception will be ruined. Cross-country road trip? A lot of traffic and that giant rubber band ball smell. But college? College is one of those rare experiences that, for the most part, lives up to expectations. “OMG, there’s really a quad.” “Eee! That professor is totally rocking a tweed blazer in this giant lecture hall.” “Ha! Frat boys are real!” But the idyllic setting of higher education has been rocked by the global pandemic and the spread of COVID-19. Most students were on spring break when they found out they wouldn’t be returning to campus for the rest of the year. “Not since the American entry into World War II have we seen such a massive and rapid transformation of higher education on a scale whereby more than 5,000 institutions of higher learning, nearly 20 million students and 1.3 million faculty have been forced ... fully online,” writes Kurt Jefferson of the Louisville Courier Journal.
The University of Michigan has projected it will lose $1 billion because of the coronavirus. 10
Collegiate flaws revealed The industry of higher education is big business worth about $225 billion. But the accelerated rate of change caused by the coronavirus is exposing fissures in the pristine facade of colleges and universities. “Rising tuition, coupled with fear of accruing mountains of student debt, have chipped away at enrollment,” reports NPR. “In 2019, 250,000 fewer students were enrolled compared with 2018.” That trend, along with the uncertainty of the virus, could push some institutions over the edge. The University of Michigan has projected it will lose $1 billion because of the coronavirus. The University of Kentucky projects a $70 million hit. “The likeliest scenario for America’s students is another semester of Zoom lectures and seminars, meaning they’ll miss out on athletics, arts, Greek life, extracurriculars and everything else that defines the college experience,” writes Erica Pandey for Axios. Zoom to the rescue? During the pandemic, Zoom (ZM) has been a savior for businesses, but a pain for college students. An online petition has garnered more than 15,000 signatures from unhappy New York University students who are balking at paying $53,000 a year for glitchy Zoom lectures. Across the country, students are demanding tuition refunds or discounts. Schools have already had to return payments collected for meal plans, dorm rooms and lab fees. But that’s not enough, according to Elizabeth Zehner, a mother interviewed by The Washington Post.
“When you save their entire lives to send them to this fabulous experience—the idyllic location, the labs, small discussion groups, and you’re writing this huge check for a comprehensive experience—to say that’s equivalent to an online course?” Zehner told the newspaper. University leaders have defended the switch to the internet by maintaining that students and their families are paying for the class credit and degree. That seems like saying couples pay for the marriage license, not the experience of being married. Profs go Hollywood Some instructors have tried to make their Zoom lectures more compelling and palatable by splicing in funny videos or asking lab students to use their own yards to take soil samples, but most students agree the experience is not the same. Besides, Grandma just can’t handle a beer bong. As the semesters and quarters draw to a close, all eyes are focusing on the fall semester. Will schools open? How do students socially distance in a packed lecture hall? “It’s revenue pressure, and the sense that if we’re the one that doesn’t open, we lose our share of the market permanently,” writes Robert Zemsky, a professor at the University of Pennsylvania. It appears that Purdue University is taking the lead in reopening in-the-flesh classes. The school’s president, former Indiana Gov. Mitch Daniels, posted a message online to explain the rationale. “Our campus community, a ‘city’ of 50,000+ people is highly unusual in its
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University leaders have defended the fees they charge for online classes, saying that students are paying for class credit and a degree—not an experience. makeup,” Daniels wrote. “At least 80% of our population is made up of young people 35 and under. All data to date tell us that the COVID-19 virus, while it transmits rapidly in this age group, poses close to zero lethal threat to them.” It’s a good thing this statement to students wasn’t Daniels’ thesis because he makes some huge leaps in logic here. He goes on to explain that Purdue will test students for the virus, hold class on alternating days and adjust cleaning protocols in residence halls. But he leaves plenty of unanswered questions. Most institutions just can’t give every student a one-person dorm room, and schools need places to isolate anyone who needs to be quarantined. And forget about those plans to study abroad. No cavalry in sight Help for struggling schools is trickling in slowly. Through the CARES Act, colleges will receive about $14 billion in aid; $6.3 billion of which must go to students who are hurt financially by the virus. While the virus can infect anyone, regardless of social status, the effects on poor and minority communities have been devastating. While on campus, two students from differing socio-economic backgrounds have equal opportunities—they attend the same classes, eat the same meals and go to the same job fairs. But at home in quarantine, inequality burnishes the differences. One student may attend Zoom lectures with high-speed internet at the family’s lake house, while another student might be forced to get a job at a grocery store to help keep the family finances afloat. “In general, when you have vulnerable populations and emergency hits them, it
tends to make their life situation worse,” writes Eddy Conroy, associate director of research and communications for the Hope Center for College, Community and Justice. If colleges don’t find ways to support students in need, the less-fortunate may lose their one shot at social mobility. The pandemic has not only rocked those schools but the small towns where many of the campuses are located. Imagine 5,000, 10,000 or even 40,000 people vanishing from an economic ecosystem. Higher education, lower expectations Moody’s Investors Service has downgraded the higher education sector from stable to negative. “Just over 30% of public universities and nearly 30% of private universities were already running operating deficits,” the service says in its guidance. Public universities have the benefit of state financial support, but states are running huge deficits because of the virus. Colleges have made huge capital outlays to get online education underway, but the money isn’t coming back in. “College endowments, which can sometimes offer some insulation from hard financial times, have also taken a hit,” a CNBC report says. The American Council on Education calls the government’s bailout plan “woefully inadequate.” International students, who are charged full sticker price, have helped colleges stay
afloat, but with travel restrictions in play, schools have seen a significant decline in foreign student enrollment. “The gloves have come off,” Angel Perez, vice president for enrollment and student success at Trinity College, writes. “You’re talking about a scenario where colleges need to enroll students at any cost.” That includes sweet perks like early registration, first choice for housing, free parking and even scholarships. Some schools are looking at the extreme measure of jettisoning NCAA sports teams. See ya later, men’s soccer. Times are tough, and decisions are difficult. High school seniors are being told to take a “gap year” before starting college. But what fun is bumming around Europe with a backpack when it’s likely to end with a hospital stay? Meanwhile, graduating college seniors face the highest unemployment rate since the Great Depression. And most reliable streams of income, like waitressing and tending bar, were rocked the hardest. Everyone who attended college before the pandemic can hold onto their memories of freedom and can hope that college kids of all ages will be able to pass out on the couch in the common room very soon. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
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The New Order Luckbox looks at the coronavirusinduced challenges that lie ahead for airlines, gaming, the stock market and almighty Amazon.
IN THIS SECTION
14
Grounded Until Further Notice
12
16
Air Travel Will Shrink to Adapt
20
Airport Uncertainty
22
Southwest Airlines: A Lot to LUV
24
Gaming Keeps Growing
28
Teddy Bear Correction?
31
Amazon: Too Big to Prevail
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WINNERS & LOSERS IN THE POST-VIRUS ECONOMY
Portraits of a nation under seige (clockwise from top left): A Southwest Airlines worker readies a plane for passengers—the company’s among the many carriers raising cleanliness standards amid the pandemic. A New York cop monitors social distancing circles in a Brooklyn park. A banner describes a tenant’s need for rent relief in Washington, D.C. An Amazon employee braves the pandemic to deliver packages in Denver. The dog could use a trim, too, as lockdown measures are eased in Miami and a barber shop reopens. In Boston, a man receives a walkup COVID-19 test in the comfort of a parking lot.
PHOTOGRAPHS: (PLANE) SOUTHWEST; (PARK) REUTERS/EDUARDO MUNOZ; (RENT) REUTERS/TOM BRENNER; (AMAZON) REUTERS/KEVIN MOHATT; (HAIRCUT) REUTERS/MARCO BELLO; (TEST) REUTERS/BRIAN SNYDER;
Some businesses are struggling to regain their footing as the pandemic continues
T
his special section of Luckbox examines The New Order that’s taking shape as the pandemic recedes in some quarters and gains momentum in others. Coverage begins with an assessment of the power of the coronavirus to change the world in wildly divergent ways. It subverts the status quo differently in three corners of the American economy—air travel, online retailing and digital entertainment. First off, the plague is humbling commercial aviation, a century-old industry with a huge physical presence and underappreciated commercial significance. Airlines and airports now reside in tortured limbo, barely able to serve customers safely or preserve their business models. The clientele has all but disappeared, and millions of workers in related business have been idled. On the other hand, COVID-19 is fueling the already overheated growth of video gaming. Players, many of them still languishing in partial lockdown, are finding diversion and interaction onscreen. The audience is expanding rapidly, and business is booming for software creators and hardware manufacturers. Meanwhile, today’s avalanche of virus-inspired home deliveries would seem to assure that Amazon will live for a thousand years. But that’s not the case. All things must end, including the ascendance of billionaire Jeff Bezos’ company. For insight into all this, Luckbox enlisted expert help. William S. Swelbar, a research engineer, consultant and airline board member, addresses air travel. Stephen D. Van Beek, a professor and consultant, holds forth on the state of the airports. Financial analyst Adam Levine-Weinberg praises a certain airline’s prospects. Venture capitalist Josh Chapman analyzes the video-gaming scene. Tom Sosnoff, co-CEO of tastytrade, the brokerage that owns Luckbox, sizes up Amazon’s prospects.
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THE NEW ORDER
Grounded Until Further Notice Will America’s air carriers ever regain their lost glory and profitability? Experts offer a resounding “Maybe” By Ed McKinley
C
ommercial air travel made the time-worn fantasy of a magic carpet ride seem lame by comparison. A packed airliner bound from Los Angeles to Honolulu might carry a business traveler heading for Taipei, a vacationer escaping to Molokai and a backpacker journeying to Katmandu. With only an air ticket, lovers were reunited, students made it home for the holidays, kids traversed a continent to meet their grandparents and soldiers returned Stateside from the battlefield. Then came COVID-19. Now, masked passengers stretch out in nearly empty cabins, cavernous terminals feel deserted and solitary travelers look lonely in seemingly abandoned departure lounges. Bored TSA employees stand idle, and seldom-used metal detectors maintain a nearly silent vigil. No one’s at the baggage claim or in line for a taxi. If a flight attracts more than a handful of travelers, outrage may erupt at the lack of social distance. Airline stock prices have plummeted, flights have been curtailed and smaller cities may lose their airports. Jobs on the ground and in the air may soon disappear. Customers who booked flights far in advance want their money back and the
14
airlines balk at returning it. Some fear the industry may never really regain its former place in American life. By the numbers Potential airline passengers have any number of good reasons to stay on the ground. Some have contracted cases of COVID-19 that make them too sick to travel. Others remain in state-mandated, locally ordered or federally recommended lockdown that limits nonessential trips. Many are self-quarantined because they’ve been exposed to the virus. A large number are simply continuing to maintain social distance to avoid infection. Tens of millions have lost their jobs and can’t afford air tickets. When will travelers take to the air again? It’s difficult to say. It may take two to four years for the sector to recover, industry observers tell Luckbox. But that could underestimate the magnitude of the collapse. After all, the airlines needed six years to overcome the loss of business and lack of confidence caused by the 9-11 attacks. Moreover, surviving the worst effects of COVID-19 may prove more challenging than counteracting the losses attributed to the terrorist strikes of nearly 19 years ago. The terror attacks frightened
10 B
$
The amount of travelers’ money the airlines are refusing to refund during the pandemic
26,000
The number of passenger planes in the world
25 M
The number of people who work for the world’s airlines.
people all over the country but were actually limited to a small number of high-profile targets. The coronavirus can potentially invade every home in the nation. The threat of terror attacks lingered, but the assaults occurred on a single day. The virus seems nearly certain to recede slowly from American life with the discovery of vaccines and treatment, but it may not totally disappear for generations. And the differences don’t end there. Even though Americans’ grasp of the enemy’s identity and motives seemed vague in the “war against terror,” the adversary was human and therefore not totally beyond understanding. But the novel coronavirus that causes COVID-19 poses an invisible, poorly understood, nonhuman threat. It could mutate even before mankind gets the better of it in its present form. Like other viruses, it resides in a gray area: Scientists say it’s not really alive and not really non-living. That state of being may seem hard to fathom, but people have plenty of time to contemplate it during these days of self-isolation. They’re certainly not rushing to the airport to catch a flight. By some estimates air travel last month was down 95% from the corresponding period a year earlier. On a spring day last year, 2.5 million might board flights. This year, 90,000 was typical. On the slightly brighter side, air cargo traffic increased slightly year over year. Don’t discount the qualitative While the numbers don’t lie, they don’t tell the whole story. Air travel still captures the imagination of many Americans. Sure, the glamour of the “jet set” faded decades ago, and for weary business travelers, boarding a fully booked plane doesn’t seem much different from crowding onto a bus at rush hour. But many still look forward with great anticipation to a flight that seemingly teleports them to an exotic locale or launches them onto a new life path.
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PHOTOGRAPH: ALEX MILAN TRACY/SIPA USA VIA REUTERS
For now, however, some might find reality a bit grim on commercial flights. Masks make it difficult if not impossible to blunt the edge of a hunger pang by nibbling peanuts or to relax with a well-earned cup of coffee at the end of a hard day of sales calls or hours of body surfing. Many experience a vague sense of unease as they rub shoulders with fellow passengers. One can only hope the in-flight movie isn’t Contagion. Facing the danger of infection, many prospective passengers would find it difficult to concentrate on the details of an upcoming business meeting or ruminate on the news that broke at yesterday’s conference. They might feel too distracted to enjoy the prospects of a getaway that’s just beginning or to reflect upon the experiences of one that’s concluding. They might understandably skip the opportunity to become fast friends with the stranger in the nearby window seat. Cold, hard cash In the best of times, airlines didn’t earn a good reputation for cheerfully refunding customers’ money if something went amiss. In the era of the coronavirus, that reluctance has become a bitter point of contention. Recent lawsuits include at least one case where furious ticket holders allege that they couldn’t get their money back even when a major airline canceled their flight—even though the law reportedly requires the refund. In other suits, plaintiffs maintain that vouchers for future travel don’t hold much value in the face of today’s uncertainties about travel. Some find the tight-fisted policy cloying because the airlines and airports have received federal funding under the CARES Act. The ruckus over refunds has not escaped the notice of the U.S. Senate. Democrats in the upper chamber have introduced legislation that would require airlines to offer cash refunds. It’s not right for the airlines
to deny restitution to citizens already struggling with health problems and lost wages, especially after the carriers have received federal bailouts, Sen. Ed Markey, D-Mass., says. Besides Markey, sponsors of the bill include Sen. Elizabeth Warren D-Mass., and Sen. Kamala Harris, D-Calif. The legislators estimate that the airlines are holding about $10 billion in travelers’ funds. But some might argue the airlines need the money. It’s just not sustainable to fly five passengers to Las Vegas or Orlando on a Boeing 737 or Airbus 320, both of which were built to hold 200. Even a plane that’s 20% full on a 1,000-mile trip loses about $24,000, according to published reports. Breaking even requires filling somewhere around 70% of the seats, analysts say. Airline balance sheets began taking a brutal hit in the first quarter, and revenue nearly evaporated by the beginning of the second quarter. For details on the industry’s financial state, see “Southwest Airlines: A Lot to LUV,” pg. 20. An uncertain future In the near term, flyers can expect higher fares and fewer perks. Medics may take passengers’ temperature before boarding or demand to see a certificate certifying their good health. Masks seem certain to remain almost universal, and social distancing could become habitual. Later, even after the virus is under control, most travelers will barely recognize an airline industry transformed by the economy’s new priorities and society’s new standards. Business leaders are finding they can substitute Zoom meetings for costly work-related travel. Tourism could decline in a deep recession.
Alaska Airlines aircraft parked at Portland International Airport on May 3
Routes will cease to exist. Recently instituted flights that opened up the world to many travelers seem especially vulnerable, including flights from London to New Orleans, Indianapolis to Paris, and Salt Lake City to Amsterdam. Pollution-shaming could encourage substituting cars, buses or trains for shorter flights. With fewer passengers, airlines will switch to smaller planes. The industry could seem to take a step back into the past, some predict. But as time passes and demand rebounds, the carriers should return to fleets of mammoth jets. To maximize profits, carriers may enhance the luxury features of first class while downgrading the utilitarian coach class. The trend toward extra charges for baggage, legroom, food, beverages and other amenities could accelerate. No one anticipates a post-pandemic resurgence of cloth napkins and china coffee cups or the return of a clientele clad mostly in conservative business suits and tasteful frocks. But maybe the thrill will return. Passengers may rediscover the joy of making a deal in Taipei, relaxing in Molokai or traveling back in time to medieval-seeming Katmandu. That’s better than a magic carpet.
Jan. 1, 1914 The first commercial airline, the St. PetersburgTampa Airboat Line, began flying passengers 21 miles across Tampa Bay. It stayed in business four months. Jan. 25, 1959 American Airlines flew its first nonstop transcontinental flight from New York to Los Angeles. The carrier recently canceled that service.
If a flight attracts more than a handful of travelers, outrage may erupt at the lack of social distance. june 2020 | luckbox
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THE NEW ORDER
Air Travel Will Shrink to Adapt An aviation veteran explains how every aspect of air travel— from the size of the plane to the number of possible destinations— could be smaller at the other end of the pandemic By Ed McKinley
During his 38 years in the air travel industry, William S. Swelbar has worked as a consultant to airlines, airports and unions. He’s been a research engineer at the Massachusetts Institute of Technology’s International Center for Air Transportation since 2002 and has served on the board of Hawaiian Airlines since 2005.
uckbox sat down with aviation expert William S. Swelbar to get his take on how the industry is responding to the ravages of the COVID-19 pandemic and what role funding from the Coronavirus Aid, Relief and Economic Security Act—or CARES Act as it’s commonly known—is playing in the sector’s recovery. His responses follow. What’s ahead for the airline industry?
I’ve been doing a lot of modeling and it’s clear as mud. We need to appreciate that it’s going be different and that we don’t have all the answers yet. All we know is that it will be a smaller industry and changes are afoot. When we come out on the other end of this, there’ll be fewer people per flight and we will have fewer destinations. Hubs will not be accommodating the same level of traffic anytime soon. When might air travel recover?
It might take four years. In the meantime, United is seeing traffic to its website looking for travel in
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What fate awaits the newsstands, bars, restaurants and shops in airports?
The vendors and the concessionaires will struggle at first but win out later. People will have more dwell time in the concourse as planes are cleaned to fight the virus and because connecting flights are cut back. They’ll be more than willing to sit down and have a hamburger and a beer. Is the industry working harder to keep planes clean?
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to figure out how to repurpose themselves. It might mean you get more general aviation traffic. I don’t have the answer on that.
2021, and other carriers are seeing people searching in August and the holiday period of 2020. How are airlines responding to the pressure?
Many of the carriers just don’t see demand bouncing back like we have seen in the past. So they’re making fleet decisions they haven’t made in in prior downturns. They’re going to be parking airplanes of various fleet types going forward. Will some cities lose their airports?
Trouble always impacts the small communities first, and the carriers are making decisions to park their smaller jets. Those are the jets that are right-sized to serve many small communities. So I do believe that there will be fewer dots on the map tomorrow. The highway will become the first access point to the air transportation system for many. They’ll be driving to an airport that’s a little farther away but has more service options and more price options. Some of the airports vacated from commercial service will need
The airlines and the airports will be much more judicious in cleaning airplanes between flights. Not that they didn’t clean them before, but it will take on a whole new level. Will inflight meals disappear?
Food and beverage service will not be what you’ve come to know. What about masks?
Virtually every airline now requires masks on each of the passengers and crew. How long will it last? That’s anybody’s guess, but when we get back to flying the whole experience is going to be different. Will carriers continue to keep the middle seat open?
It’s been very carrier-specific but in this industry once one does it another one’s probably going to do it. The middle seat is going to have to stay blocked for some time, but that doesn’t mean that they’re going to do it forever. It’s not perfect physical distancing by the definition we’ve come to embrace the last couple of months, but it’s certainly a help. Can the airlines operate indefinitely with the middle seat open?
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Absolutely not. Losing the middle seat means a capacity reduction of up to 30%. Filling seats is very important, especially to the ultralow-cost carriers. This is survival of the balance sheet, and the industry has to get to a point where they are cash positive—not profitable but cash positive. Cash positive means covering core expenses. It would exclude depreciation and amortization. They have very expensive airplanes, so there’s a lot of depreciation and amortization, and just being cashpositive certainly doesn’t cover all of the financial costs. What percentage of the seats does an airline have to fill to break even?
It is very much a function of the fare you charge. But let’s call it breakeven if 70% of the seats are full. If not, you’re underwater. What’s important is to get planes back in the air, and as the customer gets more comfortable then fares will start to work their way back up. How can the industry make customers feel comfortable again?
PHOTOGRAPH: REUTERS/MARCO GARCIA
We need to win back the confidence of the consumer by showing that it is safe from a health perspective to fly. I’m a big believer in consumer confidence as the key to the success of the airline industry. The airlines sell safety, but this is a different safe and healthy than we’ve dealt with in the past. Could taking temperatures at the gate and wearing masks in the terminals and onboard help inspire confidence?
Yes, it’s a beginning. There’s going to be some experimentation along the way, but masks and temperature monitoring are among the first forays into helping people become comfortable that they’re not within the close proximity to somebody who might have the virus. It will slow the boarding process
and make airlines less efficient, so therefore we’ll be flying less. Passengers may not appreciate becoming part of a MASH unit when they get to the airport. Taking the longer view, many regarded air travel as a luxury in the ‘60s. Will that become the case again?
I’ve spent way too much time thinking about this. What we’re going to see is more segmentation of travel. There are going to be challenges across the spectrum of carriers. American, Delta and United are going to be looking for what I hate to call the 1960s passenger, but definitely the less-elastic price business passenger. Those are the first to get cut and among the last to come back, so this is going to be a real challenge for them. When that high-yield revenue might return is going to be a function of the economy. It’s also about going back to conventions and all of us not getting too used to Zoom meetings as a replacement for air travel. Southwest, Alaska and JetBlue will be looking for that hybrid passenger—a combination of business and leisure travelers. The ultra-low-cost guys are going to be primarily focused on leisure destinations and offering lower fares than you might get on the network or the hybrid carriers. Seat density is very important to the those carriers, and seat density absolutely runs contrary to physical distancing.
AIRBORNE HIERARCHY America’s commercial airlines fall into three overlapping categories, according to William Swelbar. He classifies them as big networks, ultra-low-fare carriers or something in between. The networks reside at the top of the hierarchy by virtue of their size, maturity and wealth of connecting flights. Everybody agrees the classification includes Delta Air Lines (DAL), United Airlines (UAL) and American Airlines (AAL), and many would add Southwest. Airlines (LUV). Together those four controlled 80% of the pre-pandemic market. Southwest deserves a place at the top because it has grown from a point-to-point carrier to one that connects traffic. It has begun using wider-distribution websites for ticketing instead of relying just on its own site. Other airlines that probably qualify for top-tier network status are Alaska Airlines (ALK), Hawaiian Airlines (HA) and JetBlue Airways (JBLU). Alaska has achieved maturity, operates big hubs in Seattle and Portland, Ore., and maintains a strong presence up and down the West Coast. Unlike most of the networks, Hawaiian remains a destination airline to some degree but still deserves network status because of its 90-year history. JetBlue may have earned a place among the big guys but remains a hybrid that mingles qualities of the network carriers with attributes of the ultra-low-fare airlines. The carrier has earned “a very strong customer following,” observers note. Ultra-low-cost carriers include Allegiant Air (AGLT), Frontier Airlines (FRNT), Spirit Airlines (SAVE) and privately held Sun Country Airlines. They have a lower cost structure than the networks and base their business model on filling lots of seats at relatively low fares.
In other words, the airlines will focus more narrowly on their established customer bases?
Yes. That’s because it’s going to get more expensive to fly. I don’t think there’s any question about that. This industry has a tremendous investment in mobile assets. It has a tremendous investment in fixed assets at airports with gates and the like.
Hawaiian Airlines planes sit idle at the Daniel K. Inouye International Airport in Honolulu.
june 2020 | luckbox
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THE NEW ORDER
And tomorrow they’re going to be using those assets less efficiently than they did pre-pandemic. That means labor is less efficient and there are not as many seats in the air. Demand will result in increased fares, and that’s how they’re going to generate the revenue going forward. Will any airlines disappear because of the virus and downturn?
I’m not going to be surprised if we lose somebody along the way. I don’t know if it’s a big network carrier or small one. I also would not be surprised if we see some consolidation activity take place. Think back to where we were in the 2000s when oil went to $147 a barrel. People realized that their balance sheet as individual carriers was not going to withstand this. So one of the catalysts to carriers consolidating was combining balance sheets, which made for a much better and much stronger company. Consolidation brought the ability to employ more people than they could individually. So, Northwest
WHO’S CARRYING WHOM? In the aviation industry, the big carriers rely on business travelers who don’t shy away from paying full price for tickets, while the smaller airlines strive to fill plenty of seats with families getting away for a budgetminded vacation. Middle-sized players tend to direct their appeals to both the business and leisure markets. The business-oriented big airlines include Delta, United and American. The ultra-low-fare carriers are Allegiant, Frontier, Spirit and Sun Country. The companies in the middle include Southwest, Hawaiian, Alaska and JetBlue. Post-pandemic, the players at the two ends of the spectrum may concentrate their attention on their core markets, says industry consultant William Swelbar.
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joined hands with Delta. Continental joined hands with United. American merged with U.S. Airways. So consolidation has an upside?
Quite honestly, if we hadn’t gone through the consolidation that we went through between 2008 and 2012, I would say that we would have a bankrupt industry today. The case made before the regulators in that period was that we’re stronger together than individually, meaning that a combined balance sheet has a better possibility of weathering the storm than one balance sheet. I’m not convinced that the large network carriers are going to look to consolidate, and I’m not so sure that the regulators would have an appetite for carriers that big to join hands. So that takes American, Delta, United and Southwest out of the discussion right there. There’s been a lot of speculation in the industry that Frontier and Spirit might join hands. JetBlue was certainly interested in Virgin America and was bidding very aggressively for it until Alaska bought it. There are some combinations down there in the bottom six smallest airlines where you potentially could make a case that consolidating bolsters the balance sheet and makes for a better competitor against the Big Four. So, predictably, larger carriers have the best chance of staying alive. Has CARES Act funding from the federal government aided or impaired the quest for survival?
Both. It was money to help keep people on the payroll through Sept. 30 of 2020. But it required that if you served a city every day, you needed to keep providing at least one flight a day to that destination. As a result, airplanes are flying empty every day in order to meet requirements of the government grant money. So the industry is burning
significant cash. Maybe 17% of the seats are full, and that’s hardly a prescription for profitability. CARES just buys time to think about how they might be able to maintain as many jobs as possible. It’s a Band-Aid to get from here to there. Under the CARES Act there was at least some government attachment as part of those grants. And there is also some reach for equity in terms of the loan portion of the CARES Act. But all of that really just goes through Sept. 30 of this year. Then the government could wind up owning part of an airline?
I don’t think the government really wants to be in the airline business. But Congress should appreciate just how important commercial aviation is. It drives over a trillion dollars a year in economic activity. It facilitates the movement of people and goods. It’s a vital industry. That’s why the airline industry got help after 9-11 and day after day after this pandemic struck. If you lose the infrastructure, you can’t rebuild it anytime soon. And I think that’s why people are willing to step up quickly with help. Could the CARES Act be costing airlines money?
The CARES Act money that the carriers received to meet payroll was based on payroll in the second and third quarters of 2019. But the payroll in 2020 was bigger, so the CARES Act probably only meets 75% of the true cost. But you can’t lay off anybody until Oct. 1, So, once again, they’re burning cash. Does that mean that carriers might have been better off turning down CARES Act funding?
They had to think about when the traditional lending windows might close. People were in the unknown and had to bolster liquidity. That
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outweighed anything else. They were thinking they could possibly try to build some cash generation in the months of August and September. Will the airlines lay off workers when the CARES Act mandate ends on Oct. 1?
Yes, absolutely. Right now, what the carriers have been good at is getting some voluntary furloughs. People might want to take the summer off—that kind of thing. But come Oct. 1, we’re going to have a significant number of layoffs and some of it will be involuntary. So there’s going to have to be negotiation between the unions and the carriers over the coming months about ways to ease this. People are going to have to be creative and accept the fact that the industry’s going to be smaller. It’s a hard reality for carriers that have taken a lot of pride in creating good-paying jobs over the last decade. And they’ll have to give some of that back.
infrastructure projects have been financed that they carry forward and get those done. Where we pour concrete today is going to prove very, very important tomorrow. And there’s some discussion that the airports might want to go back for a second $10 billion. While the industry is lobbying for those funds, could it also seek regulatory changes?
What the industry would like in the immediate term is trust immunity to get around that requirement under the CARES Act where you have to fly a route with an empty airplane. If there’s another carrier flying that route, maybe they could consolidate traffic in the immediate term. Say that Airline A and Airline B are both scheduled to fly. They’d just put everybody on B. So maybe A flies on Monday, Wednesday and Friday, and B flies on Tuesday, Thursday and Saturday. In effect, you’re sharing the cost. You would be burning less cash because you would be consolidating traffic on the airplane.
Did the CARES Act affect airports?
Airports got their own CARES Act. They got $10 billion, and that was distributed in a controversial way. There’s some clawback going on because some small airports out there got more money than a bigger airport. For that smaller airport, it could cover their operating expenses through 2070. That’s not where we should have distributed the money. Will that funding keep airports from cordoning off unused concourses?
I’m of the view that if an airport was a hot spot pre-pandemic, it’s going to be one post-pandemic. We were infrastructure-constrained in a number of airports pre-pandemic, and while demand may not bounce back immediately, it will ultimately get there. So I hope that in places where
Will Congress or regulators demand that airlines take certain actions?
Congress loves to regulate the airline industry. People on The Hill think they can run the airline business better than the executives do. So they write some laws that don’t necessarily work commercially. We’re in this period where people aren’t necessarily willing to say you have to take the temperature at the gate. We can’t test at the gate because we don’t have enough tests. Are we going to be forced to have that MASH unit at Gate 35? It’s likely that could happen. We’ve talked a lot about America. What’s happening abroad?
The story that I’m watching closely is Lufthansa, and my favorite headline this week said that in less
CARES Act funding doesn’t cover the full cost of airline payroll, but its caveats prohibit layoffs and force carriers to fly empty planes. The industry might have been better off without federal financial support. than 65 days the airline returned to the traffic levels of 65 years ago. Lufthansa is 100% publicly traded, and they’re talking about a $9 billion dollar bailout from the government of Germany in return for a 25% stake. It’s going to be really interesting to see where this goes. The big guys in Europe are publicly owned—you know, British Airways and KLM—but they’re all talking to their governments about an equity stake. This would definitely be a step backward. The question is going to be what happens with the social programs that cover their employees and make those airlines less efficient than many other airlines around the world. Are those programs going to remain intact so they really can’t do the type of restructuring that needs to be done? That is going to be part of the negotiations, and it’s just too early to tell. What else should we be saying about air travel?
The first two hours of my day are spent reading and trying to figure out what changed from yesterday. That’s going to continue for some time, but this period between now and Sept. 30 is very important. Not that I think we’ll get a clear view of what everything is going to look like, but we’re going to get a clear view of how people are taking their airlines forward.
june 2020 | luckbox
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THE NEW ORDER
Airport Uncertainty The concerns of airport administrators don’t differ much from those of airline executives. They all want their passengers back.
Does reopening require a coordinated national plan?
By Ed McKinley
A
irports were among the casualties when the commercial aviation industry crashed. To assess the injuries, Luckbox requested the aid of sector expert Stephen Van Beek. Here’s what he had to say. How long will airports and airlines remain under the spell of COVID-19?
Expertise in Airports Stephen Van Beek heads North American Aviation for consultancy Steer Davies Gleave. He advises NATO’s transportation group and was a member of the FAA Management Advisory Council.
The airlines are acknowledging that this isn’t a six- to-nine-month problem, or even a one-year or two-year problem. It’s more like a three- to five-year problem. And if it is that long, the industry will not return to the form it had on Feb. 29, 2020. There’s just no way it can go through a period of years with an abundance of capacity and lower demand. Success will vary. Airports in places like Chicago, Dallas and New York are going to come back faster than the ones in places like the Quad Cities or Providence. How do you envision the reopening?
We’ll have two stages. Let’s call the first one “The Post Lockdown/ Pre-Vaccine Period.” The second is the “Free-to-Fly Period.” In Stage I, the challenge is going to be across all of the airport
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and airline space. That includes federal agencies, like Customs and TSA [Transportation Security Administration], and airport concessionaires. Airlines and airports have to figure out how to process a growing number of people with social distancing. Airlines are communicating to passengers in their press releases that they’re going to make an extra effort to make sure aircraft are clean. Delta was saying for a while that facilities are going to be “Delta Clean,” whatever that means.
You have to have clarity. It would not be a good idea for the industry to have a haphazard airport-byairport approach because that will undermine confidence. The industry has not yet provided a coordinated public response for how it’s going to address that. And I think that is absolutely indispensable for consumer confidence.
Disease Control and Prevention] personnel. They can make sure we’re lowering the risk of allowing people into the country who might be a problem for domestic travel because of the coronavirus. Who’s responsible for reopening?
Airports are public, but they also operate commercially. O’Hare International Airport in Chicago, for example, is basically operated by the city. But some airports—like DallasFort Worth International Airport— are their own governmental unit, and we call that a single-purpose airport authority. Airports oftentimes have enterprise funds, and they have a little more authority to set commercial procurement rates than most local public agencies. So local government takes on the financial risk?
No, airports have long-term lease agreements with airlines that have provisions governing how airports will recover their operating costs and generate revenue from users. Do the feds exercise control?
Who might issue nationwide guidelines?
It may be more likely that the Federal Aviation Administration [FAA] tells airports what they can’t do rather than what they can do. Should they check everybody’s temperature when they enter the public side of a terminal? Is the FAA going to have a problem if airports do that? I don’t know the answer to that yet. What about international guidance?
For international travel it’s more likely that there will be a top-down set of protocols. Perhaps a few airports will be identified as gateways for international passengers and can have a collection of customs and immigration personnel augmented by CDC [Centers for
The FAA is the regulator of airports for safety—which is familiar and understandable—and also for economics, the environment and the current coronavirus concern. When an airport receives federal funding like the CARES Act, a number of grant assurances govern the way the airport has to make decisions, how it charges its users, what it can do with the revenue it raises and the type of profit it can get from concessions. The FAA essentially wanted the grand assurance that the airport will remain open for users after taking federal funds as part of the CARES Act distribution to airports. Is there fear of more regulation?
I think it’s less about fear of mandates right now and more about fear of uncertainty.
luckbox | june 2020
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THE NEW ORDER
Southwest Airlines: A Lot to LUV With lots of cash and relatively low expenses, Southwest Airlines’ profits and stock price will take off when air travel recovers. By Adam Levine-Weinberg
T
he COVID-19 pandemic has crushed airline stocks, and for good reason. Since late March, the number of passengers passing through TSA screening checkpoints has been down more than 90% year-over-year. And during much of April and early May, the biggest U.S. airlines were averaging just 17 passengers per domestic flight. As a result, airlines have been burning through cash at a rapid (and unsustainable) pace. This turn of events led Warren Buffett to sell all of Berkshire Hathaway’s airline stock positions in March and April. Previously, Berkshire had been a top holder of the
four largest U.S. airlines: American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV) and United Airlines (UAL). Yet some airlines are well positioned to manage the current downturn and come back stronger than ever when demand returns. Others will exit the crisis with bloated debt loads, blunting their ability to seize growth opportunities in the years ahead. In a worst-case scenario, bankruptcy could even be on the table. Southwest Airlines clearly fits into the former category. That makes the massive sell-off in Southwest Airlines stock over the past three months a buying opportunity
Grounded American, Delta, Southwest and United comprise the the nation’s four largest airlines by fleet size. 100 UAL DAL
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for patient investors. Air travel demand will likely remain severely depressed for the rest of 2020 and recover slowly thereafter. Businesses will suspend non-essential travel as long as COVID-19 poses a major threat to employees’ health. Even after the pandemic subsides, economic weakness could have a lingering impact on business travel as companies try to minimize costs. Similarly, fears of contracting the virus and high unemployment could combine to limit leisure demand. Rock-solid balance sheet Most airlines appear likely to continue burning cash for the remainder of 2020. That makes having a rock-solid balance sheet indispensable. Southwest Airlines is best-inclass in this respect. It ended the first quarter with $6.3 billion of debt and lease liabilities, mostly offset by $5.5 billion of cash and investments, putting net debt at just $804 million. By the time of its April earnings call, Southwest had increased its term loan debt by nearly $2.7 billion and received the first round of CARES Act payroll support, giving it more than $9 billion of cash. (The other half of the $3.3 billion in government payroll support funds was slated to arrive in installments between May and July.) Since the earnings report, Southwest has raised about $7.7 billion in additional capital by combining a stock offering, convertible notes, additional debt and a sale-leaseback deal for certain aircraft. Thus, while Southwest expects minimal cash ticket sales during the second quarter and average daily cash outlays of $30 million to $35 million, the airline is poised to end the period with more cash than debt. In fact, its cash and investments balance may exceed $15 billion by June 30. Ticket sales are likely to recover somewhat, albeit modestly, in the second half of 2020. And even if they don’t, Southwest will be able to further reduce cash burn later
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this year through layoffs and other austerity measures. This means the airline is in no danger of running out of cash, no matter how slow the recovery from COVID-19 may be. It also means Southwest seems unlikely to take on a crippling debt load—one of Buffett’s key concerns about airlines. While it has taken on billions of dollars of debt since March, most of that capital is sitting in cash on the balance sheet. Once demand stabilizes, Southwest will be able to use that cash to pay down debt quickly. The competition Contrast Southwest’s position to the situation at American Airlines and United Airlines. American ended Q1 with $34.1 billion of debt and lease liabilities, offset by just $3.6 billion of unrestricted cash and investments. Between CARES Act proceeds and other financing moves, American expects to end Q2 with $11 billion of liquidity. But with cash burn expected to remain at around $50 million a day in June, American could face a major cash crunch if demand doesn’t recover in a meaningful way by this time next year. Even if it avoids bankruptcy in the near term, the company’s mountain of debt makes the stock virtually worthless. United seems better off, but not by much. It had $23.4 billion of debt and lease liabilities at the end of Q1, compared with $5.2 billion of unrestricted cash and investments. It is also burning less cash than American. But while that makes bankruptcy a little less of a risk, United will still have a crushing debt load. A lucrative business model Southwest has been extremely profitable. Last year, it generated approximately $3 billion of operating income on $22.4 billion of revenue, despite a nearly $1 billion earnings headwind from the Boeing 737 MAX grounding. What’s more, it’s been profitable for each of the last 47 years—a
streak that will almost certainly end in 2020. While demand probably won’t recover fully for at least three years— Buffett’s other major concern about airline stocks—Southwest is well positioned to return to profitability faster than that. First, its route network is built around short flights of mainly one-to-three hours, which could see a quicker demand recovery than long-haul markets. Second, the company’s strategy of using only 737s keeps operating costs low, which will help stimulate traffic with low fares. Third, Southwest’s position as the top airline in numerous major cities gives it ample flexibility to deploy capacity wherever demand recovers fastest. When demand does fully recover in perhaps three or four years, Southwest’s profitability could reach new heights. Looking further ahead, Southwest could benefit from new growth opportunities if weaker competitors like American and United retrench in non-core markets. Additionally, Boeing will be more desperate than ever for 737 MAX orders, potentially allowing Southwest to lock in favorable pricing for deliveries to meet growth and replacement needs in 2026 and beyond. In contrast, American and United have had significantly weaker margins than Southwest in recent years. That margin gap will only grow over the next few years, as a slow recovery in business demand and long-haul international travel demand will disproportionately hurt the global network carriers. A compelling valuation After trading mostly between $50 and $65 between early 2017 and early 2020, Southwest Airlines stock has moved sharply lower over the past few months. The stock fell to a new multiyear closing low of $24 in mid-May. This reduced its market cap to $14 billion, compared with $30 billion as recently as February.
LUV MARKET SHARE Southwest has a strong market presence in many of the nation’s top metro areas. LUV
OA #1*
OA #2*
LA Basin (LAX, LGB, ONT, SNA. BUR) 29%
18%
15%
Las Vegas 32%
11%
10%
DC Area (BWI. DCA. IAD) 31%
23%
18%
* OA refers to “other airline.” In this instance, the next largest airline (OA #1) after Southwest in each market, followed by the second largest (OA #2). Source: Southwest Airlines May 2019 Investor Presentation
This seems like a massive overreaction. CARES Act payroll grants and the recent stock offering will cover most of the company’s 2020 losses. Even if cash flow remains modestly negative in 2021, Southwest’s debt load won’t get out of control. A few years of improving profitability thereafter could be sufficient to pay down all of the company’s pandemic-related debt issuances. When demand recovers, Southwest should be back to earning record profits, thanks to the cost benefits of shifting the fleet toward the more efficient 737 MAX 8. Net profit could rebound to $3 billion or more, justifying a stock price more than double recent levels. That upside potential makes Southwest stock a compelling buy. Adam Levine-Weinberg, an investment analyst and financial writer, focuses on the airline, retail and real estate industries. He received his CFA charter in 2017. @adamllw
Disclosure: The author owns shares of LUV and DAL.
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THE NEW ORDER
Gaming Keeps Growing The industry’s revenue projections stay healthy as more players turn to video gaming during the pandemic-induced shutdown By Josh Chapman
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Much seems to have changed, and the stats confirm that feeling. For instance, Netflix added more than 15.7 million subscribers in the first three months of this year, setting
a company record. Within four weeks of its release in March, Tiger King, a Netflix docuseries, had been streamed in 64 million households. The financial world has kept
Captive audience
Source: Twitchtracker.com
2.5
2.0
1.5
1.0
0.5
0
Oct ’19
Nov ’19
Dec ’19
Jan ’20
Feb ’20
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Apr ’20
PHOTOGRAPHS: COURTESY OF ACTIVISION BLIZZARD
Viewership on the largely video game-focused streaming platform Twitch increased 77% from January to April.
VIEWERS (IN MILLIONS)
C
OVID-19 has changed the way the world is entertained, at least for as long as stay-athome orders, lockdowns and social distancing remain in effect. Movie premieres, notably the opening for James Bond thriller No Time to Die, were postponed. Concerts, festivals and other live musical performances met a similar fate, with many delayed or even canceled outright. But as the supply of entertainment shrank, demand climbed because many Americans found themselves with more time on their hands while sitting at home in self-quarantine. Date nights at the movies were replaced by date nights on Netflix Party, a browser extension that allows for synchronized TV- and movie-streaming with friends. Live concerts were replaced with livestreams of archival band performances, such as jam band Phish’s Dinner and A Movie series.
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an eye on the obvious streaming champions amid the pandemic, but observers may have missed another sector benefiting from the growing shift to online entertainment: video gaming. Video gaming, one of the few industries thriving amid the challenges of the COVID-19 pandemic, is providing much-needed entertainment while simultaneously helping billions of people stay connected in a socially distant world. An analysis of historical and contemporary trends in gaming offers a clear picture of the industry’s overall health during the global coronavirus crisis and also indicates what may be in store for the medium’s future. In recent months, gaming has grown in popularity because so many people are spending more time at home to avoid passing along the virus. Twitch, a streaming plat-
form focused largely to game-related content, is now viewed more than Hulu. In fact, gaming viewership has increased by 77%, from one billion hours in January to 1.7 billion hours in April. On mobile, global game downloads increased 39% from January to February with 1.1 billion more downloads. In the first quarter of this year, mobile playtime is up 62% with in-app purchases up 30%. And in the absence of traditional sports, viewership of competitive eNASCAR racing took center stage on the FOX Sports network. On March 31, the eNASCAR iRacing Pro Invitational Series race drew 1.3 million viewers on FS1, making it the highest-rated esports TV program to date. As investors contemplate the sustainability of gaming’s recent windfall of participants, three questions have emerged.
CALL OF DUTY: WARZONE Call of Duty: Warzone, a free-to-play battle royale-style game published by Activision, attracted more than six million players almost immediately upon its March 10 release, and that number ballooned to well over 60 million before the game turned two months old. It features cross-platform play that enables gamers to compete whether they prefer a PC, Xbox One or Playstation 4. Activision Blizzard (ATVI), parent company of Activision since 2008, posted GAAP net revenue of $1.79 billion in Q1 of this year, beating projections.
Lockdown diversion Steam, the largest digital distribution platform for PC gaming, saw a 45% increase in average daily peak players from January to April. Source: SteamDB
Peak Users vg Daily Peak Users A In-Game Peak
25
“Given the early indicators we see in this recession, we expect video gaming to thrive throughout the next economic downturn.”
USERS (IN MILLIONS)
20
15
10
5
0
Oct ’19
Nov ’19
Dec ’19
Jan ’20
Feb ’20
Mar ’20
Apr ’20
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THE NEW ORDER
Is this gaming’s moment? The recent surge in video gaming is substantial, yet video gaming has been growing at a compound annual growth rate of more than 9% for the past 12 years— ever since the Great Recession. This 9% growth rate is twice that of other entertainment sectors, such as gambling, film and music. The video game industry may benefit from the current challenging economic landscape, but this is not “gaming’s moment.” Gaming has been growing for decades. 1
Will the new gamers stick around? No, not all of the new entrants to the gaming world will become permanent converts. Even though observers will need data from several quarters before they can assess the situation accurately, they expect significant churn. Of the hundreds of millions of new gamers, fewer than 50% seem likely to keep playing indefinitely, they say. But even with attrition, the growth remains staggering. In the United States, video game sales in March were up 35% year-overyear, as consumers bought gaming systems, accessories and software. 2
Can gaming grow during a recession? Yes. The modern age of video gaming (post 1995) is weathering its third recession. In the last two downturns, the video game industry did not decline but instead grew substantially in both revenue and number of players. Given the early indicators in this recession, industry analysts expect video gaming to thrive throughout this economic setback.
Fading stigma Perhaps the most important recent shift in gaming is that the pastime is losing its stigma. In the midst of the global health crisis, playing video games is becoming more socially acceptable than it was even 12 months ago. This newly acquired status translates into creative entrepreneurship, thriving gaming communities and investment-worthy companies. Video gaming will remain a key component of digital entertainment’s future. It offers opportunity for investment and also helps billions of players stay more socially connected during stay-athome orders, social distancing and self-quarantines. Josh Chapman, a managing partner at Konvoy Ventures, a Denver-based venture capital fund, specializes in esports and video gaming. @joshchapmn
NUMBER OF GAMERS
1995: 100 million 2020: 2.5 billion
36
average age of gamers
45%
of gamers are women
500 million fans watch esports
Going to battle Call of Duty: Warzone,the fastest-growing non-mobile game ever, is beating both Apex Legends and Fortnite in viewership. The game earned a 733% increase in players from March 11 to April 10. 50
3
USERS (IN MILLIONS)
40 30 20 10 0
March 11th
March 14th
March 20th
April 10th
“The recent surge in video gaming is substantial, but the industry has been growing at a compound annual growth rate of over 9% for the past 12 years.” 26
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THE NEW ORDER
Bear Market Models
R
Beware the unholy combination of global pandemic, sharply reduced GDP, unprecedentedly high unemployment and a bear market correction By Andrew Prochnow
It’s called a “teddy bear market” when a correction is relatively brief. Not many are predicting that in the face of the pandemic.
eactions to the COVID-19 global pandemic, including the lockdowns, quarantines and social distancing, have shut down enough businesses and industries to crack the foundation of humanity’s financial security. The quickly spreading fissures are difficult to track, but at this writing the virus has eliminated the jobs of more than 36 million Americans. Worldwide, 11.9% of the workforce has been idled, according to a 20-nation study by the Brookings Institute. Meanwhile, productivity has taken a hit. In the United States, for example, gross domestic product declined by 4.8% during the first quarter, the first such pullback since 2014. That’s enough economic turbulence to make financial markets jittery. It’s been reflected in an extreme bout of market volatility that pushed the VIX (the Chicago Board Options Exchange Volatility Index) to a new all-time high in mid-March 2020. Yes, it was even higher than during the 2008-2009 Financial Crisis. Because the S&P 500 had fallen 34% at its lowest point of the year (March 23), U.S. stock markets were proclaimed to be in “bear market” territory, which is defined as a pull-
back of 20% or more. To put that into context, bear markets have occurred in the U.S. an estimated 11 times between the 1926 and 2017 bear markets. They’ve lasted from three months to 37 months and have ranged in magnitude from a 21% decline to an 86% decline—the latter during the Great Depression of 1929-1932. “Historic performances,” (below), highlights nine of the most recent bear markets and ensuing bull markets. Of the nine bear markets, only one didn’t coincide with a severe economic contraction in the United States. The one bear market that didn’t parallel a recession was the infamous crash of 1987 (a pullback of 33%). That bear market was also the shortest of the nine included in the graphic, lasting 3.3 months. While history provides no guarantee of future performance, this data indicates that historical bear markets which have been accompanied by economic recessions have, on average, lasted longer than bear markets which have not been accompanied by severe economic impairment. That also means that since the crash of 1987, every bear market in the United States has been accompa-
Historic performances Bear markets eventually give way to the bulls. The chart’ bold numbers show the duration of recent bull or bear markets, and the percentages cover the total return for the time periods. Source: Invesco
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nied by an economic recession. Another notable data point in “Historic performances” indicates that U.S. equity markets entered a bear market in the summer of 1957— about the time the Asian Flu landed in America. The chart in “Teddy bear markets,” (right), zooms in and magnifies the performance of the S&P 500 during this period. The bear market correction shown in Teddy bear markets has been called the “Teddy Bear Correction of 1957” because it was relatively mild. The correction saw the S&P 500 hit its low on Oct. 22, 1957, down roughly 21% from recent highs. But the Asian Flu not only catalyzed a bear market correction in U.S. markets, it also caused an American economic recession lasting eight months. Once again, eight of the nine bear markets that have occurred in the United States since the 1950s have been accompanied by a recession. And two of those eight have taken place in the 21st century—the “Dot-com Bubble” correction from 2000-2002 and the “Financial Crisis” correction from 2008-2009. Based on current data and models, it appears that today’s “Coronavirus Crisis” will follow suit and become No. 3—meaning this period in history will also be characterized by both a bear market correction and a recession. At its lowest point this year, the S&P 500 slid to 34% off recent highs—well past the 20% defined as a bear market. Likewise, economic data for the United States leaves little doubt the country may already be in recession. The Bureau of Economic Analysis announced at the end of April that U.S. gross domestic product (GDP) had declined by 4.8% in the first quarter of the year. That was the
Teddy bear markets The performance of the S&P 500 during the Asian Flu. Source: Marotta Wealth Management, October 2015
first quarter-over-quarter decline since the first quarter of 2014, when GDP shrank by 1.1%. Recession is defined as two consecutive quarters with a decline in GDP. A depression is regarded as more pronounced and longer-lasting than a recession. Models indicated U.S. GDP would decline by as much as 20% to 30% in the second quarter. That would not only indicate a recession (Q1 and Q2 2020), but also the largest single-quarter decline in economic activity in U.S. history. Before the current crisis, the largest modern decline in American GDP was recorded during the late 1950s’ recession, which saw first-quarter GDP in 1958 decline by 10%. That occurred during the “second wave” of the 1956-1958 Asian Flu outbreak. The precipitous decrease also
THE BLACK DEATH Few doubt the ferocity of the COVID-19 outbreak, which had claimed 325,000 lives worldwide at press time. But, thankfully, the current pandemic’s death toll won’t match the devastation wrought by the bubonic plague known as the Black Death. Peaking for four frightening years, from 1347 to 1351, that earlier pandemic killed between 100 million and 200 million people in Europe and parts of Asia and Africa. That made it the worst plague in history. The tragedy struck when the planet’s estimated population totaled just 500 million. The recovery? Europe needed two centuries to reach its pre-pandemic population.
U.S. GDP appears likely to decline by as much as 30% in the second quarter, the most precipitous fall in history. june 2020 | luckbox
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THE NEW ORDER
underscores how the Asian Flu of the 1950s was characterized by a deep recession combined with a bear market correction—essentially the same set of circumstances observed during the current coronavirus pandemic. And this time, the threat from the pandemic is more grave than in 1956-1958 because of the higher mortality rate of COVID-19 versus the Asian Flu. The question at hand, therefore, centers on the depth and length of the current economic contraction. During the Asian Flu outbreak of 1956-1958, the U.S. economic recession lasted eight months and brought a decline in GDP (peak to trough) of 3.7%. By comparison, the Great Recession of 2008-2009 saw a decline in GDP (peak to trough) of 5.1% and lasted 18 months, while the Great Depression was accompanied by a decline in GDP (peak to trough) of 26% and lasted 43 months. If the unemployment rate is any indication, then the coronavirus crisis peak to trough decline in GDP will likely fall somewhere between the Great Recession and the Great Depression. The peak unemployment rate during the Asian Flu was 7.5% (July 1958). During the Great Recession, unemployment peaked at nearly 10% (October 2009). It’s believed that the unemployment rate swelled as high as 25% amid the Great Depression. Unemployment in the U.S. as of May 2020 currently stands at about 15%, although it is believed that figure will be revised upward when the June date is released. One would
THE SPANISH FLU The Spanish Flu of 1918-1919, the third-deadliest epidemic in history, infected 500 million people, about a third of the people in the world. It killed 17 million to 50 million, and perhaps as many as 100 million people. When the pandemic arrived, the earth’s population numbered 1.5 billion, which means—depending upon the mortality estimate—it eliminated perhaps 3% of the human race. Wartime censors softened reports of the pandemic’s spread in Germany, the United Kingdom and France to maintain military morale as World War I came to a close. Reporters remained free to report the news in neutral Spain, leading to the plague’s name.
expect it will take months, as opposed to days or weeks, for this number to come down significantly—even in the best-case scenario. Alternatively, a potential “second wave” of the virus could force another shutdown of the economy in fall/winter. If that comes to pass, it’s plausible that extreme levels of unemployment could persist for many months.
As such, this tumultuous period will eventually be characterized as either a second relatively brief and mild “Teddy Bear” correction or a second version of the long and harsh horror show known as the Great Depression. Andrew Prochnow, a longtime options trader and columnist, visits Asia quarterly and owns a stake in a technology company in Shenzhen, China. @AndrewProchnow
THE ASIAN FLU The Asian Flu of 1956-1958 was first observed in China and thought to combine Avian Flu from geese with human influenza. In the United States, the first wave of the virus peaked in October 1957, but the deadlier second wave didn’t reach its apex until February and March 1958. Between one million and two million people died as a direct result of Asian Flu, but some experts believe fatalities totaled as many as four million. It was considered the ninth-deadliest pandemic in history.
Bear markets have occurred 11 times between 1926 and 2017. They’ve lasted from three months to 37 months and have ranged in magnitude from a 21% decline to the Great Depression’s 86% plunge. 30
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Too Big to Prevail Luckbox asked Tom Sosnoff, a pioneering force in finance, for his perspective on the most disruptive force in online retail. His insight? All things must end to make way for rebirth—even Amazon. By Tom Sosnoff
C
yclical disruption is a beautiful thing. It keeps every entrepreneur motivated and every investor excited. In sports, disruption strikes annually. More than 50% of the teams that make the playoffs one year fail to make it the next. In the mutual funds business, more funds fall from the top 25% to the bottom 25% in year-over-year performance than repeat in the top tier. With individual equities, the disruption cycle packs awesome power but moves more slowly, with respect to market cap and index concentration. History suggests that of the five companies that account for more than 20% of the S&P 500—Apple (AAPL), Microsoft (MSFT), Alphabet/ Google (GOOG), Amazon (AMZN) and Facebook (FB)—only one will still be on the list in just a few years. Don’t believe it? Think back to 1999/2000. Besides Microsoft, the highest market cap winners included Cisco Systems (CSCO), General Electric (GE), Intel (INTC) and Exxon Mobile (XOM). Yes, only Microsoft’s still on the list, and it needed a historic comeback to become relevant again. Picking a survivor five to 10 years from now, a contrarian play would be Facebook. I believe the first unfathomable casualty will be Amazon. Alphabet/Google, Microsoft and Apple will be struggling to remain
relevant as Amazon implodes and new leaders emerge. History repeats Let’s go back even farther. My first job after college was with Drexel Burnham Lambert. They’re gone. When I got to the Chicago Board Options Exchange (Cboe), the first pit I traded in was National Semiconductor. They’re gone. The S&P 100 Index, where I spent the next 17 years, is practically gone. The firm that cleared my trades is gone. When we built the thinkorswim brokerage platform we tried to clear at Bear Stearns, and now they’re gone. Merrill considered buying us early on, and now they’re gone. Etrade looked at buying us, and now they’re about to be gone. OptionsXpress was our big competitor, and now they’re gone. TD Ameritrade bought us, so thinkorswim is gone— and now TD is about to be gone. Lots of people called the founders of tastytrade disruptors over the last few decades, but I despise that term. In 2020 and beyond, all companies will eventually be disrupted, and there’s nothing anyone can do about it. All things must pass “Companies have short lifespans,” says Jeff Bezos, founder of Amazon and the world’s richest man. But he doesn’t stop there. He also says that “companies come and go, and the
“Amazon is not too big to fail. In fact, I predict one day Amazon will fail. Amazon will go bankrupt ... large companies’ lifespans tend to be 30-plus years, not 100-plus years ... I know it’s inevitable.” —Jeff Bezos, November 2018. At the time, Amazon’s stock price was $1,619. The stock subsequently gained more than 45% after Bezos warned about the company failing one day.
companies that are the shiniest and most important of any era—you wait a few decades and they’re gone.” Look at the world today, and what’s the last stock anyone would want to be short? It’s Amazon. In fact, a huge concentration of the world’s capital and growth is invested in Amazon— whether it’s direct as shareholders or through its massive supply chain. Here’s a crazy stat: If Amazon were a country, its GDP would be higher than 175 other countries. That’s 90% of the nations on the planet. So why does Bezos say it’s going to be disrupted? Because he has to. That makes him sound real. But deep down, his listeners know he didn’t become the richest person alive without being among the most competitive motherf*ckers alive. Bezos doesn’t believe Amazon will fall—and why should he? On the other hand, I do believe the company will eventually experience one of the most dramatic falls from grace ever seen. And the reason is simple: Nobody will be able to raise any capital whatsoever if they can’t tie their business use-case back to Amazon. Amazon is essentially financing the next generation of companies that will seek its demise. While Amazon will face competition from large and small companies, governments will look to it for more tax revenue. Consumers will crave even lower prices. In the near-term, short puts are safe (I think). Longerterm, run, don’t walk away just from Amazon. Avoid all of the stocks with a huge concentration of the global wealth. I’m bullish on the world, but some of the companies that will lead us in the future have yet to emerge. Tom Sosnoff, entrepreneur and former floor trader, was the CEO and co-founder of thinkorswim. He’s founder and current co-CEO of tastytrade, and current chairman of the Small Exchange. @tastytrade
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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 ’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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trends life, luxury & the pursuit of happiness
DIVERSIONS
Drunk, High & Horny
America is drinking more booze, ingesting more weed and spending more time on porn sites to while away the hours in self-isolation. Luckbox looks at vices during quarantine.
By Mike Reddy
PHOTOGRAPHS: SHUTTERSTOCK.COM
T
he nation is beginning to reopen, but Americans have felt cooped up for a long time. California imposed the nation’s first statewide COVID-19 lockdown on March 19, and within a week 20 other states enforced stay-at-home orders. Eventually, nearly everyone in the country shared in the isolation. With the exception of what state or local officials deemed essential services, nearly every aspect of pre-pandemic public life was put on pause. The unprecedented shift to self-confinement with no predetermined end soon sparked rapid, impactful changes in behavior. Among the most memorable was the surge in toilet paper sales, which skyrocketed 845% online and in stores during a two-day period in March and caused subsequent shortages on retail shelves. A fair amount of attention has also focused on how people with time on their hands at home have given in to their vices. Newsfeeds and social media have tracked the increase in the sale or consumption of alcohol, cannabis and pornography. It remains unknown whether a return to regular activity will blunt vice-related lockdown appetites, but diving into the numbers may provide some insight. Turn the page for a full report.
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%
April increase in off-premise spirits sales from previous year Source: Nielsen
Alcohol Most states classified liquor stores as essential businesses, and those that didn’t, such as Pennsylvania, saw residents trekking beyond state lines to make alcohol purchases. The motivation to deem liquor stores essential—as strange as it may sound to some—is tied to serious medical considerations. Deprived of alcohol, people with alcohol use disorder (AUD) can suffer severe or even fatal withdrawal—a significant concern when hospital beds are in short supply. In any case, most Americans have had access to alcohol throughout the state-mandated stay-at-home orders, and a fair share have been taking full advantage. Meanwhile, alcohol purchases shifted from brick-and-mortar stores to apps and e-commerce platforms. One such platform, Drizly, operates in 15 states, including California, New York and Illinois. Drizly stated in a May 11 article that sales growth exceeded expectations by 400%. The increase in alcohol sales has alarmed public health experts. Of 115,000 respondents to a Flatten the Curve survey conducted in April, 22% said they increased their alcohol consumption during
COVID-19. Figures like those have prompted some associations, such as the Distilled Spirits Council of the United States, to remind consumers to drink responsibly and in moderation while in lockdown. Still, stockpiling has driven up alcohol sales, observers maintain. And many imbibers are buying booze with every intention of drinking it safely, responsibly and with others. Only virtually. They’ve taken to teleconferencing software such as Zoom and Skype to participate in “virtual happy hours” with friends and coworkers. Doodle, an online calendar and scheduling tool, found a 296% increase in group meetings booked specifically for such spirited events in March compared to February. Those trends signal changes in America’s drinking culture, with a probability that some of the new practices will endure. In the Lone Star State and a few other places, a temporary rule was enacted to aid the service industry by allowing to-go alcohol sales at restaurants. Days before the rule was scheduled to expire on May 1, Texas Gov. Greg Abbott tweeted that the practice could continue. “From what I hear from Texans, we may just let this keep on going forever,” he added.
Pandemic proof The stocks of Constellation Brands, Diageo and Brown Forman have proven defensive and resilient. 200
150 STZ DEO BF/B
100
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0 Jan ’20
34
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Mar ’20
Apr ’20
May ’20
Cannabis Like liquor stores, cannabis dispensaries were deemed essential businesses in most states where the plant was legal, albeit with a noteworthy anomaly. In Massachusetts, Gov. Charlie Baker declared medical cannabis “essential” but decided the state could do without the recreational weed that’s been legal there since 2018. That didn’t stop some residents. A record 245% spike in registrations for the state’s Medical Use of Marijuana Program occurred from March 23 to April 21. Cannabis sales, like alcohol purchases, increased significantly during the pandemic. Daily sales shot up 159% in California, 100% in Washington state and 46% in Colorado on March 16 alone, according to Headset, an analytics service provider for the cannabis industry. While those numbers dipped closer to normal in April, in many cases they were still higher than last year. An americanmarijuana.org survey of 990 U.S. cannabis consumers found more than 48% of respondents stocked up, with 55% saying it was to calm them down amid the pandemic, 23% saying it was out of fear of the virus and cannabis scarcity, and the remaining 22% saying they “just wanted to chill out with some weed.” But chilling out with some weed presents its own set of challenges and considerations, particularly for those who prefer to smoke it. Smokers, especially those who have lung disease or reduced lung capacity, are at greater risk of serious illness, according to the World Health Organization. The solution? Some medical experts are suggesting cannabis edibles. Chief Medical Officer for the American Lung Association Albert Rizzo said in an interview with Refinery29 that edibles don’t seem to do anything harmful to the airways and “don’t put you at any increased risk if you get COVID-19.”
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Problem solved—except some smokers missed the memo. In a separate americanmarijuana. org survey of 1,017 U.S. cannabis consumers, only 28% of respondents said they switched to consumption methods other than smoking. A little over 29% said they have smoked more since the outbreak, 38.5% said they’ve smoked about the same, 26.5% said they’ve smoked less and nearly 6% said they quit smoking altogether. What does any of that mean for the post-quarantine world? The resilience of the cannabis industry in the face of a distinctly harsh economic landscape has caused some observers to speculate that doors to medical and recreational legalization may open in states where pot is still illegal, especially when factoring in the attendant fiscal bonanza. In Illinois, for instance—where both medical and recreational pot are legal—nearly $1 million in cannabis tax revenue was sent to 80 rural and small-town pharmacies in March to provide financial relief in the wake of the pandemic. Other motivations, such as job creation at a time when tens of millions are unemployed, could make expanded legalization more than just a pipe dream.
was up every single day from March 19—when the first statewide stayat-home order was put into effect in California—to April 28, more often than not by double-digit percentages. March 27, the day with the highest increase in traffic, saw 23.2% more visits when compared with an average day. Part of the increase may be linked to a promotion the company launched March 25 that offered free premium memberships for a limited time. The promotion’s aim, in the company’s own words, was to “encourage people to stay indoors and distance themselves socially.” Pornhub’s verified model video uploads have been up, too, as much as 39.3% in late March. That may have a rational explanation because the company announced it would increase payouts to models to support them during the pandemic. After a 15% processing fee, the remaining 85% of video sales revenue went directly to the models for the entire month of April, Pornhub announced. Putting aside how many people are visiting the site and how many videos are uploaded to it, one quirky
trend lies in what people are searching for. As of Pornhub’s April 30 Coronavirus Update, more than 17.1 million searches had been made on the site containing “Corona,” 1.1 million for “Covid” and 8.2 million for “Quarantine.” The upswings don’t necessarily indicate the pornography industry as a whole has been thriving, particularly for models who relied upon studios, teams of workers and other models to do their work. But shifting to self-produced content is helping many navigating the pandemic. OnlyFans, a London-based subscription-driven social media platform that typically deals in NSFW (not safe for work) content, reported a 75% increase in new accounts in March. That’s 3.5 million new signups, 60,000 of them as creators on the platform. While it’s safe to assume a return to normal will reduce the number of coronavirus-themed videos and searches, the shift to self-produced content may last. If independent video-making can be as profitable as studio work, the benefits of being one’s own boss may mean sites like OnlyFans are here to stay.
34%
of Americans said they were active cannabis consumers Source: Goldenseed survey
U.S. Pornhub traffic increases The change in Pornhub’s traffic compared with an average day reached as high as 23.2%.
Pornography Three of the top 15 websites in the U.S. are porn sites. The same three sites appear among the worldwide top 11, according to SimilarWeb rankings. One of those three sites, Pornhub, regularly shares a lot of revealing data. Pornhub clocked in an average of 115 million visits a day last year, and in any given minute around 2.8 hours of video were uploaded to the site, according to Pornhub Insights’ 2019 Year in Review. Those numbers may seem surprising, but 2020 stats have deviated significantly from the 2019 norm. Average U.S. traffic to the site
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THE NORMAL DEVIATE
When Models Fail
Models aren’t just for pricing options—they can (sometimes) predict the spread and mortality of a pandemic. Just keep expectations in check. Models, by definition, are not precise and, inevitably, the people who rely on them seem less than perfect. By Tom Preston
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ere’s a fact: The people who attack the models predicting the number of infections and deaths from COVID-19 are just plain wrong. I’m not a virologist, immunologist or epidemiologist. But I do build models—financial models that hundreds of thousands of traders rely on to find profits. I understand and take full responsibility for what the models I create can and cannot do. And while I’m not in the medical field, I do understand the core mathematical model of viral or bacterial growth, and why attacking it makes no sense. The basic argument against the models goes something like this: In early March 2020, the mathematical epidemiologist Neil Ferguson and his team at the Imperial College of London published a report stating that COVID-19 could kill more than 500,000 in the U.K. and more than two million in the United States. That prompted governments big and small to “close” the economy, causing the market to crash and putting millions out of work. The actual number of deaths from COVID-19 is a tiny fraction of those projections, causing many to complain that the model was wrong and that the misery from the closed economy falls on the head of the scientists. They should be pilloried— both figuratively and literally, those critics insist. Ugh. Excuse me while I pound my head on my old calculus book.
Don’t blame the COVID-19 models. The problem is with a government and media that fail to put the models’ results into context. 36
How models work Just like option pricing models used by traders—like Black Scholes and binomial—several models predict the spread of a virus in a population, such as SIR and logistic. But just like those option pricing models, the virus models have the same core, which is an exponential function. To understand an exponential function, ex, think of a line that starts low and then curves upward, steeper and steeper the farther it goes. Exponents are everywhere. A bank account grows exponentially. Stomp on the gas, and a car accelerates exponentially. They’re very reliable tools for modeling all sorts of phenomena. Sure, the models used by the epidemiologists are more complex. But exponential growth means one sick person can turn into a thousand very quickly. For example, using a simple exponential function: e where is the rate of the daily spread of the virus and is the number of days in the future, see what happens when one sets to 60 and to .02 and then .05. e.02*60 = 3.32. e.05*60 = 20.08. Those numbers mean that if 100 people are infected now and the spread grows by 0.02, then 332 people will have the virus in 60 days. With 100 people infected now and the spread growing by 0.05, 2,008 people will have the virus in 60 days. In an exponential model, a small change in growth creates big changes in the results. Apply those numbers to the 350 million people in the United States, and it’s easy to see why two million fatalities wasn’t a long reach. Epidemiologists try to figure out . That’s where the complexity sets in. They estimate the probability of one person spreading the virus to another and the number of people each
person might come into contact with. They do that by looking at the data of number of sick versus healthy people, and the number of sick people who die versus those who recover. In the real world With the data that was available in February and early March, the Imperial College of London gave its best estimate of what the coronavirus might do. Later, as new data came in and was incorporated into the model, the model came up with a different, smaller number of potential fatalities. Critics attacked this as “walking back” the original estimate as though it was wrong and that the ICL should be embarrassed. Far from it. When new data is available, it’s input into the model for a new estimate. That works in epidemiology, science and finance. New data improves the model Imagine a hurricane developing far out in the Gulf of Mexico. It might strike Mississippi, Louisiana or Texas. As it moves closer and data is collected, its predicted landfall gets narrower and narrower. Crude oil refineries on the coast rely on those models. Coronavirus models work the same way. Models, then, provide a guide. They’re meant to be predictive and helpful in making decisions. Models aren’t wrong unless the math underlying them is wrong. Some models do indeed fail. But they tend to fail quickly and disappear from the arena for which they were created. The models for the spread of a virus, on the other hand, have been used successfully to model all sorts of outbreaks. And they get better each time. So, it makes sense to use them for the coronavirus.
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Blaming the model Critics commingle political frustration with the model. The model isn’t the problem. Neither is the scientist. The problem is with a government and with media who don’t know how to put the model’s results into context. A model doesn’t say something will happen—only that something might happen if things go the way the inputs suggest. Would people prefer the answer “some” to the question “How many people might die from COVID-19?” Of course not! Models in any framework quantify various outcomes as either likely or unlikely. It’s up to people to use that information to judge whether the benefit of a course of action is worth the risk. In trading, just because some SPX put has a 95% probability of expiring worthless doesn’t mean investors take all of their capital and use it to short as many of those puts as possible. There’s more to it. Why? Because sometimes the SPX has one of those huge drops that happen only 5% of the time, and that could put a trader out of business. So, they put that 95% into context and perhaps sell one of those puts using a small percentage of their capital. That’s called risk management, and it’s a smart way to use probabilities. Yes, trust the models that generate those probabilities, but understand that they’re not perfect. So, anyone who doesn’t like the way the response to COVID-19 has been going can take it out on the politicians in November—not on scientists and their models.
THE MATHMATICS OF CORONAVIRUS During a pandemic, real data becomes hard to find. Chinese researchers have published only some of their findings on the spread of COVID-19 in Hubei. The ongoing catastrophe of testing for the virus in the United States means no researcher has a reliable denominator, an overall number of infections that would be a reasonable starting point for untangling how rapidly the disease spreads. Since the 2009 outbreak of H1N1 influenza, researchers worldwide have increasingly relied on mathematical models, computer simulations informed by what little data they can find, and some reasoned inferences. Federal agencies like the Centers for Disease Control and Prevention and the National Institutes of Health have modeling teams, as do many universities. —Wired.com
Reported COVID-19 deaths since February and forecasted deaths for the next four weeks in the United States. The CU models are based on assumptions about the effectiveness of current interventions. All of the other models were created with the assumption that social distancing would continue through the time period shown.
Tom Preston, Luckbox contributing editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate. tp@tastytrade.com
“All models are wrong” “Scientists generally agree that no theory is 100% correct. Thus, the real test of knowledge is not truth, but utility. Science gives us power. The more useful that power, the better the science.” This aphorism, which applies not only to statistical models but also to scientific models in general, is attributed to the statistician George Box. He cited it in a 1976 paper published in the Journal of the American Statistical Association.
—Yuval Noah Harari
2.2 million deaths estimated in the United States if the coronavirus were left to spread without mitigation. Source: The Imperial College
The key premise of 81% of the population being infected should have raised more alarms than it did. Even the deadly “Spanish Flu” (H1N1) pandemic of 1918-19 infected no more than 28% of the U.S. population. The next H1N1 “Swine Flu” pandemic in 2009-10, infected 20-24% of Americans. Source: Cato.org
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THE POLITICAL TRADE
5% Growth? Bet on it. How does this seem possible? Read the fine print. By Byron Druthers
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he last time the American economy grew by a quarterly rate of 5% or more was in the third quarter of 2014, thanks partly to consumer spending that rose at an annualized rate of 3.2%. Job growth for the year was stronger than it had been for well over a decade. Fast-forward to 2020, and the COVID-19 crisis is menacing the nation’s health and ravaging the economy. So why would it make sense to bet in the prediction markets that the nation would achieve a 5% or greater GDP growth rate by the end of the year? PredictIt’s “Will the U.S. economy hit 5%+ GDP growth by yearend 2020?” market is a slam dunk YES (contract), but it’s trading in the mid-to-low 70¢ range (suggesting a 70% probability of occurring) and has been for a while. What gives? How could an economy mired in post-crisis sub-3% growth doldrums possibly break out to such an extent in the midst of global pandemic? In this case, the value flows from market participants’ confusion over what constitutes a YES or a NO outcome. As originally written, the contest rules were so opaque that PredictIt had to issue a supplementary comment. The clarification stipulates the market will be resolved as measured by “annualized, seasonally
adjusted, real quarter-over-quarter growth in GDP” and subsequently reported by the Bureau of Economic Analysis (BEA). So how does the fine print render what appears at first glance to be a sure loser of a trade into a clear-cut YES? Let’s refer to the rules clarification: It say it measures “annualized, seasonally adjusted, real quarter-over-quarter growth in GDP.” Since the quarterly growth will be annualized, that 5% headline growth target is a bit misleading. A 5% annualized growth rate is equivalent to about 1.23% of quarterly growth. Furthermore, this reflects quarter-over-quarter instead of year-over-year growth. Whereas year-over-year growth compares a given quarter to the corresponding quarter one year earlier, quarter-over-quarter growth simply compares consecutive quarters. In a year-over-year measure, Q3 of 2020 would be compared to the halcyon days of Q3 2019. Since the metric is quarterover-quarter, growth in Q3 2020 real GDP will be measured against a baseline of the social-distancing hellscape of Q2 2020. In light of Q2 2020 forecasts of economic contraction to the order of roughly 30% annualized—and the BEA’s initial 2020 Q1 estimate of a huge 4.8% jump—to satisfy a YES in this
5%+ GDP growth by 2020? Yes
70¢
1¢
No
30¢ 1¢ 267K Shares Traded
market all that needs to happen is for Q3 2020 to be a 1.23% or better improvement in real GDP over the low of Q2 2020. With a massive fiscal and monetary stimulus already announced— and additional relief continuing to take shape—this market appears to be a gimme YES. Though black swan paths in this market could resolve NO, and while the holding period might be a little longer than optimal for some prediction market traders, there’s still more than enough value here to make the money printer “go brrr.” Always read the fine print. Byron Druthers is the pen name of a registered representative of a Wall Street firm who asked that we not disclose his political trading. He contacted Luckbox as a listener to the magazine’s podcast, The Political Trade.
Prediction Market Pricing The 70¢ pricing in this market equates to the market constituents’ projection of a 70% probability that the market will resolve YES. The binary option pricing model means the contract will trade between 1¢ and 99¢, and correct market contracts will expire at the full value of $1. In this instance, a contract purchased at 70¢ expiring at $1 approximately six months later yields a return of 43% and an estimated annualized return on investment of 104%.
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Want insight into wagering on political prediction markets? Check out Luckbox’s The Political Trade wherever podcasts are available. Weekly episodes feature top PredictIt traders and political insiders, such as Anthony Scaramucci and James Carville.
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DEREK PHILLIPS’ BEST BETS A super trader who’s ranked among the top 100 traders on PredictIt’s leaderboards shares tips on which markets have attracted his attention—and his money
Which party will win North Carolina in the 2020 presidential election? Buy Democrat YES or Republican NO under 50¢ Traders love to ponder the Democrats’ chances in Wisconsin and Arizona, but it’s a mistake to overlook North Carolina. Democrat Roy Cooper is primed to run for reelection in North Carolina as one of the most popular governors in the country and is polling about 20 points better than his opponent. Similarly, North Carolina Republican Sen. Thom Tillis has high unfavorables and will run against a young military veteran, Cal Cunningham, who is largely unknown but has no major weak spots. Add to this that the Obamas will probably focus their surrogacy on this state more than any other, and former Vice President Joe Biden should get enough help from his friends to pull him over the finish line.
Who will win the 2020 Georgia Democratic Senate primary? Buy Teresa Tomlinson YES under 30¢ It’s hard to handicap this race because there isn’t much polling data, but Teresa Tomlinson is in a stronger position than her price suggests. Democrats in Georgia are eager to advance the political prospects of young, progressive women, and there’s no denying Tomlinson’s potential. With her working-class background and popularity as mayor of largely black Columbus, she should do well with Georgia’s African-American base, which is essential to secure the nomination. Her opponent in the primary, Jon Ossoff—a candidate big on name recognition after his high-profile loss in the 2017 Sixth District special election—is viewed as a weak candidate in the general against Republican incumbent Sen. David Purdue. If Tomlinson’s campaign is grounded by the pandemic, there’s a chance Ossoff wins on name recognition alone, but it’s smart to bet she finds a way to break through.
Which party will win NC in 2020? Republican
53¢
2¢
Democratic
48¢ 1¢ 115K Shares Traded
Who’ll win the GA Dem Senate primary? Jon Ossoff
69¢ 1¢ Teresa Tomlinson
33¢
2¢
14K Shares Traded
Derek Phillips began trading political futures professionally during the 2016 election, turning $400 into $400,000 in four years. Phillips has appeared on Episodes 5 and 6 of The Political Trade. @dmpfrompi
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FINANCIAL FITNESS
Fit for COVID
The same qualities that compel the fitness-minded to work out can comfort and empower investors in bad times By Jim Schultz
AND
J
ust like that, gyms are closed, cardio classes are canceled and fitness enthusiasts everywhere have all been thrust into the throes of training at home. Hamstring slides with paper plates, Bulgarian split squats off the ottoman and inverted rows underneath the kitchen table. What a strange time to train. Nevertheless, to have any hope of emerging from that #quarantinelife with anything beyond a slouch perfected during a couple of sedentary months, innovation is now a mandatory requirement and adaptability a necessary skill. No longer is it enough to progress by simply adding a little extra weight to the bar or increasing the number of sets in a session. Work capacity is improved in brand new ways, and systems are taxed with fresh ideas. Innocent little 10-pound dumbbells must be made more difficult with paused reps and half reps, slower tempos and faster tempos. Classic push-ups are reinvented from various angles with various hand positions, using jumps, claps, bands and blocks. YouTube searches for “How to train legs in the living room” have gone up tenfold. A challenging environment to achieve one’s fitness goals, indeed. Interestingly, though, while circumstance has mandated a break from dogmatic training principles and archaic belief systems, the characteristics necessary to succeed remain untouched and unblemished. Progress when training in the gym requires discipline. Progress when training in the garage requires the same. Hitting the weights every evening on the rubber mats demands
Global health club industry revenue totaled $94B in 2018.
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KEEP CALM
consistency. Hitting the bands every morning on the carpeted floor demands the same. Blasting a new one-rep max on barbell back squats calls for patience. Blasting a new all-reps max on body weight air squats calls for the same. Discipline, consistency and patience—the same qualities are required with or without a gym and specialized equipment. It’s easier to be disciplined, stay consistent and remain patient when nestled comfortably inside one’s comfort zone, where adversity is an afterthought. But during coronavirus chaos, these attributes are exposed, for better or worse. Not only did the virus send shockwaves through the gym system, it also happened to take down the global economy. And thus, investors should expect some serious stock market wreckage. Thankfully, every negative news headline doesn’t issue a death sentence for the Dow. The COVID carnage that ripped the face off the market in a matter of weeks, days, maybe hours, is similar to the 9/11 terrorist attacks or the 2008 financial market meltdown, in that they all happened with a swiftness not seen in quite some time and all looked like the continuation of a predictable plot. But, how many seemingly catastrophic events does the market shrug off, causing dismay among prognosticators? How does a quiet Tuesday afternoon with relatively benign headlines bring a supercharged sell-off that bamboozles everyone, including (and especially) said prognosticators? Sure, after-the-fact it’s clear. Later, anyone can match the day’s stories to the market move.
Studios are creating YouTube workout videos to keep their clientele entertained and active. Orangetheory, for instance, is sharing a free 30-minute workout on its website every day.
WORK OUT But trying to predict which story will carry the next leg in price action is a fool’s errand. No one knows. No one can know. Knowing the unknowable is a difficult feat. But it’s understood that drops in the equity market frequently come out of nowhere and rip through a profitable portfolio statement in the blink of an eye. Down moves happen fast. Black swans sneak onto the scene and ruin the fun in what had seemed a sea of white. So, what’s a trader to do in bad times? The same things as when times are good, markets are calm and trades are clear. Take a disciplined approach and stick to the mechanics. Have a consistent methodology for following the process. And most of all, cultivate the patience to let the probabilities play out over time. Discipline, consistency and patience. The attributes that get the fitness-minded off the couch and into a set of curls can give the finance-minded peace and calm, even amid a sea of uncertainty. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
A member of 24Hour Fitness has filed a federal lawsuit against the national health club chain for continuing to charge fees despite governmentordered COVID-19 closings of all gyms.
The U.S. has more than 40,000 fitness facilities employing more than a million people.
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THE POKER TRADE
Essential Tips for Online Poker COVID-19 has shuttered the casinos, so here’s what amateurs need to know to play online with the pros. By Jonathan Little
T
he COVID-19 virus has wreaked havoc not only on the economy in general but also on the live poker arena. Essentially, all casinos have closed, forcing poker players to play online instead. Anyone new to online poker will find that it somewhat similar to live poker but should note a few major differences. In a casino or home game, players can see their opponents. That enables astute readers of people to adjust their strategy to take advantage of the mistakes opponents are making. For example, a specific opponent might sit up a bit more when he has a strong hand and slouch with a weak hand. When his posture improves, fold decently strong but non-premium hands. When the slouch returns, bluff him out of the pot. Online, players can’t see opponents. Some strong live players fail online because their best skill (reading their opponents’ mannerisms) has been taken away. But instead of relying on physical tells, players should instead learn a fundamentally sound strategy and adjust it only if opponents make mistakes they can capitalize on. Declining win rate In live poker, a potential win rate can be quite high, perhaps 30 big blinds per 100 hands in cash games filled with recreational players. With $1/$2 no-limit, that works out to about a $20 per hour win rate. Online though, players are generally stronger at the same buy-in, resulting in much lower win rates. At $1/$2 online, the best players in the world win about $8 per 100 hands, which is about 40% as much as live players. That may not sound too bad because more hands are played per hour online, but consider the fate of those who aren’t the best players in the world. If they win at $10 per hour live, they may win only $2 per
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hour online—or even lose. As the win rate decreases, players must keep a larger bankroll to ensure they don’t go broke because of the standard variance of poker. In general, strong live players may need to keep only 25 buy-ins in their bankroll, whereas online players often need 100 buy-ins or more. Make sure to understand the variance of the game before signing up to play! More than one table When playing live, there’s only one table to focus on at a time. Playing just one table online leaves a long wait for the next hand. With a lot of downtime, why not play more tables? A pro who sits down for a long online tournament session might load up 20 tournaments at a time ranging from $100 to $2,500 buy-ins. That provides the opportunity to invest a lot of money in a short period of time, even with a relatively low win rate at each individual table. Winning a little bit on a lot of tables can produce more profits in the long run than winning a bit more on only a few tables. While readers may not want to learn to play 20 games at once, they should learn to play at least four. To master that skill, spend a few hours playing about twice as many tables as normal but for tiny stakes. Continue playing tiny stakes while adding more tables. Once a player can handle eight or so at a time, playing four will seem like a breeze. Juggling lots of tables, players get comfortable with making deci-
Some strong live players fail online because their best skill has been taken away.
sions quickly and moving onto the next hand. Don’t wait to see what happens after making a substantial bet. Move on to the next decision. Shortly, it will become apparent whether that substantial bet on the other table won or lost. Unlicensed and unregulated While some sort of legitimate gaming commission regulates and licenses essentially all casinos, that’s not necessarily true for online poker sites. Legal sites available in some states include PartyPoker, PokerStars, 888, WSOP and Borgata. Those sites are safe and operate like major casinos. Play only on the licensed, regulated sites. If none are available in a region and a player decides to frequent bogus sites, he should keep only enough money in them to play for one day. Shady sites may close and refuse to return money. The government has closed nearly every illegal site in America over the last 15 years, and the others have failed without meeting their obligations or have simply stolen money from players. If taking a risk on one, be sure to keep it minimal. During the last year, extremely shady mobile apps have come onto the market. Don’t play on them. They may demand a deposit through a middleman the player doesn’t know, and there’s no assurance a mysterious middleman will pay winners. The apps have the potential to be crooked in many ways. They don’t have security or fraud teams. Strong online players may lose on the apps, mainly from rarely winning when they get all-in. If something seems fishy, it probably is. The apps are nothing but trouble. Be smart!
PokerStars Sunday Million An international online poker tournament held late in March shattered a record for entries and generated an $18.6 million prize pool, making it one of the largest online tournaments ever. PokerStars said the “Sunday Million” prize pool was the largest in company history. A record 93,016 entries played in the $215 buy-in tournament. “AAAArthur” bested the other finalists, winning the championship on the final hand with a full house—twos over Jacks—and collecting nearly $1.2 million. Runner-up “CrAzY sTeFaN” pocketed $921,328. It’s the thirdlargest prize pool in the history of online poker.
43% increase in daily online poker sessions since the pandemic 255% increase in first-time poker players Source: optimove
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
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TRADER
1. tastytrade studio 2. Coding python 3. Cherry Picks newsletter 4. More coding in python
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2 3
4
MICHAEL RECHENTHIN
Watch Rechenthin and the rest of the data team
Office tastytrade, Chicago
Average number of trades per day? One.
How did you start trading?
What percentage of your outcomes do you attribute to luck?
Home Chicago Age 42
I became interested early on, in junior high. My dad was getting an MBA at the time and had a ton of books on finance and trading. I became interested in trading and stocks because of the excitement and the potential. We never talked sports at home—instead we regularly talked business. Your favorite trading strategy?
I’ve had the best consistent luck with the basic covered call and the short put. Each month I take money out of my checking account and put it straight into my investment/trading account. I can
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What part of life can’t be attributed to some degree of luck? I personally want to minimize luck as much as possible. Is it too presumptuous to think that only 30% of my success can be attributed to luck? Luck is part of the great unknown! So, I do things that work in my favor. I make thoughtful decisions as to where I place my money. I sell options to try to lower the overall costs around my positions. Favorite trading moment?
My most memorable moment was when
I was a clerk on the floor of the Chicago Stock Exchange. I started as a clerk, which is a glorified lunch and coffee scout. One of the senior traders had the day off, so the head of the firm let me trade for him. The stock dropped, I got short, all the while thinking I was long, and got long when I thought I was getting short, and made a ton of money. Complete accident. Everyone thought I was a genius. I played it up and got promoted the next day. But it was a complete mistake; I was the ultimate luckbox. Worst trading moment?
Again, I was trading on the floor. I was making markets and short a large position when Jim Cramer started hyping the stock up on television. I received a complete onrush of orders to buy, couldn’t get out of my own position since I had customer orders to fill and I got completely run over. I had a huge loss and felt completely exhausted. Think about how scary something as abstract as shares of stock going against you can be.
PHOTOGRAPH: GARRETT ROODBERGEN
Years trading 20+
always find something that I think is worth purchasing. And depending on how bullish I am on a particular stock or exchange-traded fund, I either stick closer to the current price or place my call farther away. Options, along with a strategy, have the advantage of being able to reduce overall volatility.
Head of data science, tastytrade
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CALENDAR
PHOTOGRAPH: (WWDC) REUTERS/MASON TRINCA
TRIPLE ECLIPSES & QUADRUPLE WITCHES The summer solstice weekend, June 20-21, portends prodigious difficulty for both the United States and the rest of the world. A new moon/solar eclipse occurs just nine hours after the sun marks the solstice. Among astromancers ... a worrisome situation. What’s more, the summer solstice solar eclipse has two accompanying lunar eclipses— on June 5 and July 5—instead of the more typical single lunar eclipse. So, eclipse season, and its potentially startling effects, lasts longer than usual. The solar eclipse on June 21 could be rough on the U.S. because of where the planets line up for the District of Columbia. The July 5 lunar eclipse makes a strong connection to the horoscope for when the country was born in 1776. In the markets, the solstice and solar eclipse occur the weekend after quadruple witching day on June 19. Based on astrological transits, Euro FX could make a low on June 15, with gold following suit on June 17. Near the lunar eclipse on June 5, soybeans could make a high on June 8. Meanwhile, 10-year T-notes make a low on June 8 that propels prices higher into a June 26 peak. Surprisingly, neither crude oil nor the S&P 500 show any potential for significant highs or lows in June based on astrological transits to their horoscope charts. Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter. @susangsays
JU N E 2 The Wall Street Journal’s Tech Health Conference Virtual event
4 National Cheese Day
5 Full Moon in Sagittarius Lunar eclipse 5–7 Governors Ball Music Festival Canceled New York 6 tastytrade & Cboe Symposium Series* Postponed New York
9–11 E3: Electronic Entertainment Expo Canceled Los Angeles 11–14 Bonnaroo Music and Arts Festival Postponed Manchester, TN
International Sushi Day Celebrated since 2009, International Sushi Day was created not only to promote the popular Japanese cuisine—although that certainly plays a role in the festivities—but also to raise awareness about common myths and misunderstandings surrounding the dish. Perhaps the most common myth is that all sushi consists, at least partly, of raw fish. Actually, a wide variety of cooked and vegetarian-friendly options are on most sushi restaurant menus. Sushi restaurants had a pre-pandemic $22 billion market share in the U.S., according to IBISWorld, with an average industry growth rate of 4.8% from 2014-2019.
John Ternus, Apple VP of Hardware Engineering, speaks at Apple’s 2019 WWDC
17 Adobe 99U Conference Virtual event
18 International Sushi Day
1 8–21 U.S. Open Postponed Mamaroneck, NY 20 Summer Solstice First day of summer 21 New Moon in Cancer Solar eclipse 22 Apple’s Worldwide Developers Conference Virtual event
25 2020 NBA Draft Brooklyn, NY
*For more information visit tastytrade (events)
Apple’s Worldwide Developers Conference Almost since its 1987 launch in Santa Clara, CA, Apple has been hosting its Worldwide Developers Conference (WWDC) annually to showcase some of the company’s newest software, as well as new technology geared toward software developers. 2020’s WWDC will take place amid the global pandemic, albeit with some major changes. For the first time, the event will be held virtually, and attendance will be free for all developers and Apple enthusiasts. While the conference is usually software-focused, some observers expect hardware surprises, including the potential unveiling of Apple’s answer to over-ear headphones, the AirPods Studio.
june 2020 | luckbox
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GET THE BEST OF BOTH WORLDS Trade a product that is efficient like futures & simple like stocks.
Learn more at thesmallexchange.com Š 2020 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.
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trades actionable trading ideas
OPTIONS
I T ’S T H E LUCKBOX F I RST RU LE O F T RADING : KN OW YOUR OPTION S
Your Thinking Must be Skewed By Tom Preston
the options requires a computer. Quick definition: Implied vol is the vol input into a theoretical option pricing model (e.g., Black-Scholes) that makes the theoretical value of the option equal to its market value. In other words, it converts the market price of the option into terms of volatility. When an option’s price is higher, all other things being equal, its implied vol is higher, too. Skew to the rescue It’s possible but cumbersome to calculate implied vol by hand. But it takes a computer to run the iterations required to find the solution. While Black-Scholes had been around since the ‘70s, the technology to calculate implied vols quickly and efficiently was just starting to gel in the ‘80s. Once the implied vol for each option is calculated, the implied vol skew is the phenomenon where the implied vol is different across strike prices. The skew is a curve, sort of a wide, tilted “U” shape. Skew is visible when there’s higher and higher or lower and lower implied vols for successively OTM calls and puts. When looking at OTM calls and puts equidistant from the
Smile Black-Scholes predicts a flat shape, but as we move away from at-the-money options to out-of-the-money options, the skew smile appears.
Implied Volatility
t’s said with good authority that volatility “skew” was born Oct. 19, 1987, when the magnitude of the market drop on Black Monday indicated all those previously out-of-the-money (OTM) puts that were now in-the-money had been much too inexpensive. Before volatility skew entered the world, the theoretical value of options was determined by a single volatility per underlying. Say, 30% for IBM options or 20% for SPX options. But the ’87 crash taught traders that some huge price changes could happen quickly in modern markets and that an out-of-the-money put valued at .20 should have been valued at 2.00 to account for those possibilities. Instead of a single volatility for all options, each option would have its own implied volatility based on its market price. If the OTM put that was .20 is now 2.00, its implied vol would be much higher, too. But it wasn’t just the crash of ’87 that gave rise to the skew. Technology played a role, too. The reason is that volatility skew is the curve of the implied volatility of the options, and to calculate implied vol for all
I
In the money calls
Out of the money calls
Out of the money puts
In the money puts
At the money calls / puts
Strike Price
at-the-money (ATM) strike, the side that has the higher implied vol “points” to where the market sees risk. The reason is that market participants might be buying OTM puts because they fear a crash and drive up the put prices and in turn their implied vols. The skew would thus “point” to the downside. Alternatively, the market might be buying up OTM calls because traders expect a big rally and drive up call prices and in turn their implied vols. This skew would point to the upside.
june 2020 | luckbox
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Black gold or Texas tea? Typically, the skew of crude oil options points toward the upside, indicating fear of political unrest or disruption of supply. Recently, it points toward the downside, meaning the coronavirus could push futures even lower. Light Sweet Crude Oil Futures (/CLNO) | 17-Jun-20 | Strategy: Long Out-of-theMoney %
Ask
Bid
CALLS
47D
PUTS
43
153.50
7.15
7.22
17.5
2.34
2.39
153.72
57
44
149.10
6.76
6.84
18
2.45
2.51
149.49
55
46
145.03
6.38
6.46
18.5
2.57
2.63
145.37
54
47
141.07
6.01
6.08
19
2.70
2.75
141.50
53
48
Bid
Ask
Implied Volatility %
49
137.14
5.64
5.72
19.5
2.83
2.88
137.62
51
50
133.61
5.29
5.36
20
2.97
3.03
133.83
50
52
130.34
4.96
5.02
20.5
3.14
3.20
130.78
48
54
127.59
4.63
4.70
21
3.32
3.38
127.81
46
55
124.88
4.33
4.39
21.5
3.51
3.57
125.04
45
57
122.35
4.03
4.10
22
3.71
3.78
122.61
43
59
119.89
3.74
3.82
22.5
3.92
3.99
120.08
41
61
117.37
3.47
3.54
23
4.12
4.22
117.55
39
63
115.13
3.21
3.27
23.5
4.37
4.46
115.39
37
65
112.87
2.96
3.02
24
4.63
4.70
113.21
35
66
110.86
2.72
2.76
24.5
4.89
4.96
111.14
34
68
108.90
2.49
2.55
25
5.16
5.23
109.07
32
70
107.11
2.29
2.34
25.5
5.46
5.53
107.48
30
72
105.64
2.10
2.15
26
5.76
5.84
105.95
28
74
104.24
1.92
1.97
26.5
6.08
6.16
104.16
26
76
103.04
1.75
1.81
27
6.25
6.49
102.35
24
Typically, the skew points toward the downside for stocks and equity indexes, and toward the upside in commodities, although that’s not always the case.
A Whiteboard Illustration of Skew
Strike
Out-of-theMoney %
Implied Volatility %
Putting skew to work The shape of the skew is driven by market supply and demand. Because it’s the result of buying and selling, it’s a real-time clue about which direction the market thinks the underlying (security) may be headed. And “thinks” is the operative word. Just because the skew is pointing out risk in one direction or the other (underlying price higher or lower) doesn’t mean the price of the under-
lying stock, index or future will go there. After all, the skew in SPX and /ES options was pointing down for years and the market moved higher during that time before it crashed in February and March of this year. So, skew doesn’t tell where the market is headed, just where the market is afraid it might. If that’s the case, what value is skew to the trader? Rather than using skew to determine whether a stock, index or future might go up or down, skew should be used to inform strategy. Let’s see how. A product that recently crashed, and in fact had its price drop below
zero, is crude oil. Crude oil and options can have interesting things in their skew. Typically, the skew of crude oil options is pointed toward the upside, which indicates the market fear that there could be a spike in crude oil because of political unrest or disruption of supply. But recently, the skew in crude oil is pointed toward the downside, with the implied vol of OTM puts higher than that of equidistant OTM calls. That’s because the lower demand for oil after the impact of the coronavirus could push crude oil futures even lower. This is an image of crude oil options with 47 days to expiration with the
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price of the crude oil underlying future at $22.30. The implied vol of the 20.5 put is 130.78%, higher than the 110.86% implied vol of the 24.5 call, and both options are roughly the same number of points OTM from the current price of crude oil. The skew, then, is pointed toward the downside, and the prices of OTM puts are relatively high. Bullish and bearish strategies in crude oil can take advantage of the elevated put prices. Traders who are bullish on crude oil might consider shorting the 21.5 put, for example. It’s worth about 3.54, and its implied vol is 125.16%. The theoretical value of that put with the 120% ATM implied vol would be about 3.34. That’s .20 or 5.6% less than its current price. A way to think about it is investors willing to take the risk of a bullish
2006-trades-options.indd 49
trade in crude oil are taking in a 5.6% larger credit for doing so. Now, the way implied vols and prices work is a bit more complex than that, but for trading purposes this makes sense. The higher credit for the short put means that the potential reward is higher and the risk is lower. But how does one work that short 21.5 put into a bearish trade? Traders who are bearish on crude oil might consider the long 21.5/23.5 put vertical, which is short the 21.5 put and long the 23.5 put. The debit of that long vertical is lower because of the skew. If the 23.5 put is worth 4.40, and the 21.5 put is 3.54, the debit of the vertical is .86. But if that 21.5 put was valued at the lower implied vol and was worth only 3.34, the debit of the vertical would be 1.06. In this case, too,
When an option’s price is higher, all other things being equal, its implied vol is higher, too.
the skew gives the long put vertical higher potential reward and lower potential risk because its debit is lower. That .20 may not seem like a lot, but over the course of a trading career, selling each put for a bit more credit or buying each long vertical for a bit less debit by taking advantage of the implied vol skew can add up to a lot of money. That edge can make a big difference in the long term over thousands of trades. This is just a simple example of how the skew can give each trader— the bull and the bear—an advantage. Combining knowledge of the skew and where rich and cheap options might be with knowledge of option trading strategies can give an investor’s performance a little boost, and increase both the potential profit and the probability of making money.
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FUTURES
A SAV V Y F U T U R ES T RA D ER’S TAK E O N T HE M AR K ETS
Less Than Zero By Pete Mulmat
50
A new level The daily chart of the expiring May futures contract in natural gas and crude oil highlights the pronounced divergence between these two competing energy markets. 80
3.0
60
2.5
40
2.0 /CLK20 /NGK20
20
1.5
20 20 /
4/
20
20
20 / 3/
20
20 / 2/
19
20 / 1/
/2 0/ 12
/2 0/
19
19 11
19
20 / 10 /
19
20 / 9/
20 / 8/
7/ 20 /
20 / 6/
20 / 5/
20 / 4/
20 / 3/
20 /
19
0 19
-40 19
0.5
19
-20
19
1.0
19
0
2/
ll of the attention in markets was focused on crude oil the week of April 20, when on that Monday and Tuesday, the price of West Texas Intermediate (WTI) crude oil fell to a new all-time low, below zero, and to negative $40.32 per barrel in the expiring May futures contract. Any trader who had believed the risk of a long position on the downside in oil was zero learned a painful lesson. Meanwhile, another energy commodity that tends to be even more volatile than the oil market turned in a different performance. While natural gas and crude oil moved in opposite directions at the beginning of the previous week, the oil market taught natural gas market participants a number of critical lessons that traders should not ignore. (See “A new level,” right.) Natural gas tends to make lows at the end of the peak season and rally in the spring, which could account for recent price action. However, monthly implied volatility at the 80% level was appreciably higher than during the past three years in April when it stood at 20%-30%. The higher level of price variance is a function of overall conditions in markets across all asset classes in 2020. (See “Higher rally,” right.) Natural gas has been a wildly volatile commodity since the inception of trading on the NYMEX in 1990. Over the life of trading in natural gas futures, the price range has been lows of $1.02 in January 1992 to highs of $15.65 per MMBtu in October 2005, following the devastating effects of Hurricane Katrina on the Gulf Coast of the United States and the natural gas
A
Higher rally The higher level of price variance is a function of overall conditions in markets across all asset classes in 2020. Expiration
Strike
IVx
May 26, 2020 /NGM20
24d
88.20%
Jun 25, 2020 /NGN20
56d
72.80%
Jul 28, 2020 /NGQ20
89d
66.90%
Aug 26, 2020 /NGU20
118d
62.70%
Sep 25, 2020 /NGV20
148d
59.50%
Oct 27, 2020 /NGX20
180d
50.20%
Traders learned a painful lesson if they believed the risk was zero in a long position on the downside in oil.
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Ranges abound Over the life of trading in natural gas futures, the price range has varied betwen lows of $1.02 in January 1992 to highs of $15.65 per MMBtu in October 2005.
15
10
5
products that replicate price action but are not structured to reflect all market conditions. Average summer realized volatility in natural gas is 35%. (See “Ranges abound,” above.) As referenced in “Typical gas moves” (right), some of the smallest average daily moves occur in the months of May through August. With natural gas futures implied volatility at highs and skew nearly flat, selling volatility with strangles or defined risk put or call spreads affords traders attractive opportunities on both sides of this market. 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.
n Ja
20 20 Ja n
20 16
2 n Ja
n Ja
20 1
8 20 0
4 20 0 Ja
n
20 0 n Ja
n
19 9
6
0
0
Ja
infrastructure in Louisiana. While natural gas ignored the action in crude oil the week of April 20, traders should learn a lesson from the oil market. The delivery point for NYMEX oil futures is in Cushing, Okla. The lack of storage capacity sent the price of crude oil to under negative $40 per barrel as the expiration of the May contract approached. Those with long positions found themselves selling at any price to close risk positions. The delivery point for NYMEX natural gas is in Erath, La., and a similar situation in the future could send the price of natural gas below zero. Crude oil futures had never traded below the $9.75 level before last week. Oil’s journey into a bearish abyss that week should teach market participants in the natural gas arena at least two lessons when it comes to risk parameters for the energy commodity. First, the potential loss on a short put option is not limited to a zero price. Put options tend to trade at lower implied volatility levels than equidistant call options as market participants assess the risk of the upside at infinity and the downside at zero. However, oil reminded natural gas market participants that there is no implied put at zero in the market, and the price could fall into negative territory. The second is that the highly liquid ETF and ETN products could suffer structural issues if the market were to go negative before administrators and issuers make changes to reflect the potential for negative values. The lesson from oil is that there are additional risks when using
Typical gas moves Historically, the smallest average daily moves occur May through August. Jan
+/-3.8%
Feb
+/-3.1%
Mar
+/-2.3%
Apr
+/-2.7%
May
+/-2.3%
Jun
+/-2.5%
Jul
+/-2.2%
Aug
+/-1.9%
Sep
+/-2.1%
Oct
+/-2.7%
Nov
+/-3.5%
Dec
+/-3.3%
june 2020 | luckbox
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THE TECHNICIAN
A V E T E RA N T RA D ER TAC K LES T EC HNICALS
Technically Speaking, the Future Does Not Look Very Bright By Tim Knight
hile the year began with tremendous optimism, record-high stock prices and an extraordinarily positive business environment, much of the economy soon came screeching to a virtual standstill in the face of the pandemic. The speed and violence of the reversal ravaged the economy in the first quarter. Take, for example, vehicle sales in the United States. The data spans decades, going back to when Gerald Ford was president and General Motors still dominated the world’s auto sales. Over the years, broad upturns and downturns in sales have roiled the auto industry, but March of 2020 was simply unprecedented. Sales reached some of the highest points of the past 40 years before plunging to the levels of the financial crisis of 2008 almost instantly. It happened because virtually the entire country was asked to stay home or travel as little as possible. The lack of travel, coupled with the shuttering of auto dealerships, led to the sharp drop, which will surely go lower. A retail clothing sales chart shows this well. It would be easy to mistake the nearly vertical line at the right edge of the chart for part of the grid, such as the vertical axis. This is the net change from February 2020 to March 2020. Even on a multi-decade chart, it’s a prominent feature. (See “Jaw-dropping,” right.)
W
Jaw-dropping The net change from February 2020 to March 2020 stunned the market.
Misery Index Higher inflation and higher unemployment bring greater misery, and vice versa.
Misery loves company The paradox of economic downturns is that they happen just when they seem least likely. But just as “it’s always darkest just before the dawn,” the converse is also true. Remember the Misery Index (right)—a combination of inflation data and unemployment data— created in the 1960s? It states that combining
52
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higher inflation with higher unemployment engenders greater misery and vice versa. By definition, when cycles are at a nadir (in this instance low unemployment and low inflation), the upturn in those cycles means things are getting worse. In early 2020, the Misery Index was at about 3.5, the lowest level in more than half a century. This chart goes back to World War II, and there was hardly any instance when, based on this indicator, people were less “miserable.” Then came the pandemic. Another powerful pivot point that took place at the same time was in interest rates. As an economy improves, rates tend to slowly increase. As demand for funds increases, lenders can increase the price of money and an economy that’s getting stronger can support the greater debt service. As the tinted portion of the chart in “Ready for a turn?” (right), shows, interest rates have been slowly building a base of support after several decades of sliding. The rounded bottom pattern seemed to indicate that substantially higher interest rates—and lower bond prices— were coming in 2021 and beyond. However, the worldwide economic crisis compelled central banks to slash rates to essentially 0%. Thus, as with the auto sales graph, the path of the graph instantly plunged. Although this chart goes back for 60 years, interest rates have never been nearly this low. The most reliable indicator Long-term charts not only indicate where a trend might be heading but also provide earlier examples of a given type of behavior and offer insight into what happened next. One especially well-known example of this is the chart of the difference between the 10-year treasury rate and the three-month bill rate. This “spread” chart captures the difference in these interest rates, which in normal economic times is about 3% because longer-term debt instruments paid substantially more interest than shorter-term ones. However, during times of economic strain, when faith in the future diminishes and fear of the present increases, this spread can collapse and even invert. In other words, three-month debt instruments actually pay better rates than the 10-year ones. Historically, these instances of “curve inversion” have had a 100% success rate for predicting imminent recessions. With the graph
Ready for a turn? Interest rates have been slowly building a base of support after several decades of sliding.
Better bet The three-month debt instruments actually pay better rates than the 10-year ones.
shown here, the tinted areas mark the precursor events of: The 1982 recession following massive interest rate hikes; The 1990 recession around the Japanese financial crash; The 2000 bursting of the internet bubble; The 2008 financial crisis; The 2020 bursting of the “everything bubble”
It’s likely the bottom for sales will be far deeper. june 2020 | luckbox
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In response to this latest recession, the Federal Reserve has taken actions so extraordinary that they make the bailouts of 2009 seem tame. Literally trillions of dollars of fiat money have been conjured out of thin air to combat the economic downturn, and one chart that captures this is the graph of the assets held by the Fed. (See “Fed’s latest assets,” right.) Six general phases occur from left to right: 1. The slow, steady “keep inflation at 2%” accrual before the financial crisis, when the Fed actually had some vague semblance of normality and decency (at least relative to today); 2. The explosive ramp-up to combat the financial crisis; 3. The continuation of asset acquisition, less frenetically than in 2009 but at a vastly sharper pace than before 2008; 4. A leveling out to form a “flat top’ region when the acquisition of new assets stopped; 5. A cautious, measured, carefully planned tapering, ostensibly to get the Fed back to its pre-crisis balance by the year, oh, let’s say 2350; 6. Then the latest freak-out, which exploded the balance from $2 trillion to $6 trillion on the way to $10 trillion this year. Bear market ahead From 1982 until 2020, a period of nearly four decades, the public has become extraordinarily accustomed to a never-ending bull market. Although there were brief periods of weakness (1987, 2000 and 2008 in particular), on the whole, stocks have ascended with the support of an endlessly accommodating Federal Reserve and an enthusiastic public. As the chart of the S&P 500 Index illustrates, the overall uptrend has actually been in place since the 1930s, and a “channel” style uptrend was in place from March 2009 until just recently. The dislocations and damage from this latest economic downturn will probably create a much longer effect than the brief “V-shaped bottom” that politicians are touting. As multi-decade charts illustrate, the sudden changes in all aspects of the economy could create an extraordinary bear market with longevity measured in years, as opposed to weeks. Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com
54
Fed’s latest assets The Federal Reserve has created trillions of dollars of fiat money to try to combat the economic downturn, as illustrated in a graph of the Fed’s assets.
Bears prepare The overall uptrend has been in place since the 1930s, and a “channel” uptrend was in place from March 2009 until just recently.
The Fed has conjured trillions of dollars out of thin air to combat the COVID-19 economic downturn.
luckbox | june 2020
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CHERRY PICKS
R I PE & J U I CY T RADE IDEAS
When Airlines Stocks Resume Flight
Sign up for free Cherry Picks and market insight at info.tastytrade. com/cherry-picks
By Michael Rechenthin
ecause of coronavirus fears, the only seats filled these days are the ones in front of TVs. With very few people traveling, airline stock prices have declined an average of 50% during the past few months, prompting long-term investing maven Warren Buffet to make the unusual announcement that he was exiting his positions in the sector. The decline has caused implied volatility in those stocks’ options to skyrocket. But high volatility can mean more opportunity.
B
Below are two trade ideas. American Airlines (AAL) plunged 65% in the past three months and has a volatility of 165%. With volatility that high, traders can sell a naked put (a bullish strategy) in mid-July at 50% below the current stock price and receive a credit and max profit that could generate a return on capital of nearly 10% real-return on money in the next few weeks. JETS is an airline exchange-traded fund (ETF). Because it’s an ETF, it’s a diversified
portfolio and carries less risk than an individual airline stock but much more than the S&P 500. JETS has a volatility of 82%, versus the 29% of the S&P 500. Consider a covered call, another bullish strategy, which is buying 100 shares of JETS and selling a slightly out-of-the-money call. At those levels, the call can help protect against the downside risk of the stock falling by 9%. That means the price of JETS can decline by 9% and traders could still make money.
Up in the air Consider stocks with a rating of three or four liquidity stars. It’s easier to execute trades in their options with less slippage. Description
Price
Current Volatility
3-month price change
12-month price change
Liquidity Stars
DAL
Delta Air Lines Inc.
$22
99%
-61%
-60%
4
AAL
American Airlines Group Inc.
$10
165%
-65%
-71%
4
JETS
Airline ETF
$13
82%
-57%
-56%
4
UAL
United Airlines Holdings Inc.
$24
115%
-69%
-71%
3
LUV
Southwest Airlines Co.
$27
72%
-54%
-49%
3
JBLU
JetBlue Airways Corp.
$9
98%
-55%
-51%
3
SAVE
Spirit Airlines Inc.
GD
General Dynamics Corp.
ALK RYAAY
$10
128%
-77%
-79%
3
$132
31%
-29%
-23%
2
Alaska Air Group Inc.
$29
88%
-54%
-51%
2
Ryanair Holdings PLC ADR
$58
76%
-37%
-20%
2
CPA
Copa Holdings SA Class A
$43
86%
-59%
-56%
2
HA
Hawaiian Holdings Inc.
$13
98%
-55%
-53%
2
ALGT
Allegiant Travel Co.
$75
108%
-54%
-48%
1
GOL
Gol Intelligent Airlines Inc ADR
$4
163%
-76%
-70%
1
SKYW
SkyWest Inc.
$29
70%
-50%
-52%
1
ATSG
Air Transport Services Group Inc.
$21
79%
VLRS
Controladora Vuela Compania de Aviacion SAB de CV ADR A
$5
100%
MESA
Mesa Air Group Inc.
$4
OMAB
Grupo Aeroportuario del Centro Norte SAB de CV ADR
SPY
SPDR S&P 500 ETF Trust
Higher #s mov e more
-2%
-6%
1
-63%
-52%
1
335%
-48%
-56%
1
$31
n/a
-49%
-36%
-
$291
29%
-12%
1%
4
june 2020 | luckbox
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DO DILIGENCE
QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS
The Art of Sector Selection By James Blakeway
s the world economy struggles through the COVID-19 pandemic, market turbulence may continue for the foreseeable future. But where some see panic and volatility, others find opportunity. Younger, more passive investors know they have plenty of time until retirement and can therefore rest easy while their 401(k) plans buy more shares at lower prices. Meanwhile, active traders can thrive in times like these because larger price swings can mean larger profits—or larger losses when risks aren’t managed. Regardless of investing experience, everyone can find opportunity in market downturns. While some scramble to pick which beaten-down hospitality or airline stock may skyrocket in recovery, others look to exchangetraded funds (ETFs) for baked-in diversification that could mitigate risk. Using an ETF to purchase stocks enables these investors to buy a basket of stocks without piecemealing their funds and figuring out how much of each firm they need or want to purchase. A good starting point for newer investors is the index ETFs, products that provide exposure to the broad U.S. stock market indexes (see “Wrong guide,” right). News outlets continue to quote the Dow Jones, but it offers the least diversification with only 30 stocks. Because the Dow assigns higher weightings to the highest-priced stock, Boeing (BA) was the largest component before falling from grace recently. The current largest holding is UnitedHealth Group (UNH) at 8.2%. Both the S&P 500 and Nasdaq 100 likely offer a more compelling investment for those seeking diversified, broad market exposure. While both offer access to the largest publicly traded firms, it’s important to note the heavy concentration of some stocks in both indexes. Just five stocks—Microsoft (MSFT), Apple (AAPL), Alphabet/Google (GOOG &
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Wrong guide News outlets continue to cite fluctuations in the Dow Jones, but the index’s 30 stocks offer the least diversification. (Data as of April 15, 2020) Index
ETF Symbol
S&P 500
SPY
500 of the largest U.S firms
Nasdaq 100
QQQ
Dow Jones Industrial Average Russell 2000
Return 2010–2019
Deepest Decline in Q1
$277.76
252.76%
-30.32%
100 large domestic and international non-financial firms
$209.43
415.99%
-20.37%
DIA
30 of the largest U.S. core companies
$234.95
246.22%
-34.31%
IWM
2,000 small cap publicly traded firms
$117.80
205.87%
-39.70%
Description
Price
Sector ETFs checklist Sectors saw stark differences in performance through Q1 of this year. All posted negative returns, but the magnitude varied significantly. (Data as of April 15, 2020) % of S&P 500
# of Stocks Held
Deepest Decline in Q1
Sector
Symbol
Technology
XLK
25.4
$87.03
71
-22.80%
Healthcare
XLV
15.9
$96.62
60
-26.40%
Communications Services
XLC
10.7
$47.57
26
-25.00%
Financials
XLF
10.6
$21.65
66
-42.10%
Consumer Discretionary
XLY
10.3
$108.39
63
-30.30%
Price
Industrials
XLI
7.8
$60.81
72
-39.70%
Consumer Staples
XLP
7.8
$59.20
33
-22.30%
Utilities
XLU
3.4
$58.63
28
-29.80%
Real Estate
XLRE
3.0
$33.68
31
-33.70%
Energy
XLE
2.7
$32.06
27
-60.10%
Materials
XLB
2.4
$48.60
28
-37.10%
GOOGL), Amazon (AMZN) and Facebook (FB)—constitute over 23% of the S&P 500 Index and nearly 55% of the Nasdaq 100 Index. Investors may be comfortable with the exposure
to those large, household-name firms, but keep this in mind if considering a portfolio with both the Nasdaq and S&P ETFs. The Russell 2000 Index ETF differs from
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 are 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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trades
Something new Investors seeking opportunities could allocate capital in sectors underserved by the weightings of the S&P 500. 20% 10% 0% -10% -20% -30% -40% -50%
XLK Technology XLV Health Care XLF Financials XLI Industrials XLP Consumer Staples XLU Utilities XLE Energy
40% of the total index. Investors seeking opportunities could allocate capital in sectors underserved by the weightings of the S&P 500, like the energy sector. The virus hit energy companies hard, and weak demand for fuel caused oil futures to plummet. At points in Q1, this sector ETF was down more than 60% on the year with limited signs of a full recovery in the immediate future. Some energy firms may not survive low demand and low prices in oil. However, the sector ETF provides access to 27 of the largest American energy firms that can likely withstand tough times. A strategy to consider for investors already exposed to the S&P 500 or another market index ETF is to add exposure to sectors, like energy, that have been weak in the early part of 2020 and are underserved by the broad index. Other sectors that make up less than 4% of the S&P 500 include materials, real estate and utilities. As with energy, investors could add exposure in these underserved sectors. Stock analysts are struggling to come to grips with new revenue projections as they issue new guidance on stock prices. ETF retail investors can avoid most of this guesswork by being exposed to an industry or sector instead of a specific stock. Optimistic investors can simply look at pre-COVID ETF prices as rough guidance on how far they might expect an ETF to rise and
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the other three indexes. Its 2,000 firms are far smaller, with the median for company value at $560 million, versus the S&P 500 median of $19.3 billion. As the concentration of the S&P and Nasdaq push more and more into the mega-cap tech firms, the Russell 2000 ETF provides investors a sliver of exposure to each of the component stocks. The largest component equals just 0.86% of the total portfolio. Regardless of the diversification offered by the Russell 2000, the index has underperformed the other three over the past decade. An investment in the Russell ETF returned only half of the Nasdaq ETF gains from 2010-2019. The COVID-19 outbreak had a greater impact on the Russell 2000 in Q1, posting nearly a 40% drawdown compared with 20% in the Nasdaq. A contrarian-minded investor may even bet that the Russell’s small cap firms could be due for a resurgence over the next decade. Some investors will look to get more granular than the index ETFs without assuming the risk of individual stocks. One potential strategy for that is to use sector ETFs to supplement a diversified portfolio. Investors can choose from a plethora of sector ETFs offered by a variety of ETF issuers. The SPDR Select Sector ETFs offer a comprehensive breakdown of the sectors in the S&P 500 index. (See “Sector ETFs checklist,” p. 56.). As expected, the sectors saw stark differences in performance through Q1 of this year. Despite all seeing a negative return, the magnitudes across the sectors varied significantly. The technology sector, perhaps unsurprisingly, saw one of the shallowest drops, combined with a fairly rapid recovery. The consumer staples sector saw very similar price action. That’s because of the fairly limited impact on business for both sectors during shelter-in-place orders. Another sector to watch is healthcare. The SPDR healthcare ETF followed a similar trajectory as consumer staples and technology because of an ever-present demand for healthcare products. The healthcare ETF focuses on firms that specialize in the production of drugs and medical equipment. Is it worth investing excess funds in sectors that saw limited impact from COVID-19? Probably not. A more prudent use of funds may be to diversify into sectors that have been harder hit but could recover. Note that any investor who has exposure to the S&P 500 as a whole has large holdings in technology and healthcare, as they combine to account for
consider the ETF discounted. By the end of Q1, the energy sector ETF was trading at 50% below its price at the end of 2019. It’s possible to consider this a 50% discount on the ETF. If investors assume that in the next few years the world will return to normal pre-COVID global economic conditions, the demand for oil and energy will return. Thus, the industry and the sector ETF should recover. Investors who use options may also capitalize on these sector ETFs. As with most products, the sector ETFs are demonstrating heightened volatility, which translates into higher options prices. Investors willing to buy these sectors at lower prices can sell put options in an attempt to capture these higher premiums. Whether purchasing ETF shares or trading options, index investors should evaluate their sector exposure to decide if they want to expand their allocation to lagging sectors that could rebound. As always, passive and active investors should be mindful of the ever-changing investment landscape and always do their due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors. @jamesblakeway
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tactics essential trading strategies
BASIC
This is No Amazon Delivery
Trading crude oil presents daunting challenges when its price falls into negative numbers and the owner must take delivery. Here’s a look at the high cost of free oil.
By Anton Kulikov
Oil price freakout For a single day this spring, it appeared that the world would pay traders to own oil. 80 60 40 20
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So, why not find a place to store it and a way of getting it there? Storage and transportation, like oil, are commodities, meaning that their price is determined by supply and demand. When the COVID-19 pandemic broke out, the demand for oil dropped by so much that oil producers did not have time to adjust their output in the short term. That caused demand for oil storage and transportation to skyrocket, while the supply of storage and transportation is more or less fixed, especially in the short term. The result? A massive increase in the price of storing or transporting oil means that even taking into account the money received from buying the oil, the associated costs rose a lot. So, what does this mean to the individual investor? If things seem too good to be true, they probably are. Looking at oil and saying, “I should buy it because it can’t go below zero,”
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he COVID-19 pandemic’s major disruptions to the global economy have trickled down to the global stock markets and caused massive spikes in volatility. For reference, the U.S. stock market plunged roughly 34% in less than a month and then proceeded to make back half of its losses in the following month. If that didn’t instill enough fear among individual investors, what came next could be described as the single craziest moment in commodities markets history: negative oil prices. Essentially, getting paid to buy oil. But don’t immediately log into a brokerage account to place an order to buy crude oil and expect to receive thousands of dollars for doing so. First, traders should understand why oil became “free” in the first place. To understand how the main U.S. crude oil benchmark works, take a trip to Cushing, Okla. That’s where traders pick up oil when they buy a contract and hold it through expiration. The one catch is that storage and transportation of oil is NOT included with the free oil. That means the recipient has to pay to store or transport the oil. To further complicate matters, a “barrel” of oil does not come in one of those fancy 55-gallon drums pictured here. The trader is paying only for the liquid oil itself. This means anyone who takes possession of the oil has to transport and store it immediately. It’s not OK simply to collect thousands of dollars for buying the oil and then pour it into the streets, rivers or lakes and then go forth and call it a profitable day.
isn’t an option because the market has demonstrated that negative prices can occur. Anyone looking to trade oil for its high levels of volatility may consider spreading off risk via options or back-month contracts. Better yet, investors who don’t fully understand how the contract trades should stay away completely. Many other energy products aren’t as volatile, are still liquid and settle to stock instead of physical crude oil. Some examples are energy exchange-traded funds (ETFs), such as Energy Select Sector SPDR Fund (XLE), SPDR S&P Oil & Gas Exploration and Production ETF (XOP), and VanEck Vectors/Oil Services ETF (OIH). Each of these energy ETFs carries decently high implied volatility and maintains a somewhat strong correlation to crude oil. Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
june 2020 | luckbox
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tactics
INTERMEDIATE
Here Are Some ETFs to Avoid Many commodity ETFs represent bad long-term investments By Michael Rechenthin
I
nvestors often want part of the action when commodities start to move around, especially when prices decline. It’s logical then that they often head to exchange-traded funds (ETFs). What’s not to love? They’re easy trading vehicles that don’t require special trading permissions, and the prices are affordable for most accounts. But many commodity ETFs represent bad long-term investments. Traders sink money into them each month expecting to make a profit on a rebound in the underlying commodity, only to have it underperform consistently. Don’t believe it? Take a look at the table of only a few timespans in “Short sighted,” (right). The United States Oil Fund ETF (USO) underperforms the price of oil by an average of 1% per month. So, the longer the commodity stays flat, the greater the position is that’s working against the trader. It isn’t a scam. No one is bilking investors. It’s simply the method the ETF’s creators used to build USO to make it trade in ways similar to the price of crude oil. The logistics of oil prevent storing it easily. Thus, the creators of the ETF use futures contracts to purchase the commodity on behalf of the ETF product. But the futures contracts disrupt the ETF. The Natural Gas ETF (UNG) is equally bad for longer-term investors. Perhaps worse. Don’t jump into the natural gas ETF thinking a summer decline can easily lead to a massive spike and that the increase in demand during the winter drives prices up. The Natural Gas ETF tends to underperform the price of the commodity by 2%. The math—and therefore the probabili-
The diversification benefits of gold and silver ETFs make them a worthwhile risk. 60
Short-sighted The United States Oil Fund Exchange-Traded Fund underperforms the price of oil by an average of 1% per month. July 2009–June 2014
Crude increased 48%
USO declined, -1%
July 2015–May 2018
Crude increased 37%
USO declined, -18%
March 2020–April 2020
Crude declined, -44%
USO declined, -62%
Long-term plunge After adjusting for splits, the price of the United States Oil Fund in 2006 was $560. Now, it’s $18—a decline of 97%.
800
600
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200
0 Jan ’08
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Jan ’12
ties—line up against anyone losing an average of 2% a month on a long position. Need more convincing? Look at a long enough timespan of USO. After adjusting for splits, the price of USO in 2006 was $560. It’s now $18, which represents a 97% decline. See “Long-term plunge,” (above). UNG fared worse, after accounting for reverse splits and high management fees, it was the equivalent of $1,600 in 2007. It is $13 now—a 99% decline. What commodity ETFs don’t have a considerable drag? Two of the biggest are the gold (GLD) and the silver (SLV) ETFs. The fund administrators literally keep gold and silver in
Jan ’14
Jan ’16
Jan ’18
Jan ’20
vaults. Futures are created for the product, but not to the extent that oil and natural gas companies use them, which creates very little drag in the product—a monthly drag of 0.05% in gold and 0.1% in silver. For the diversification benefits that gold and silver provide to a portfolio of long stocks, that might be a worthwhile risk. Briefly stated, gold and silver trade in and trade out. Don’t procrastinate. Don’t hold. Investors can hold both longer without the worry associated with oil or natural gas. Interested in increasing the probabilities even more? Consider a short put in silver or gold. For now, avoid oil and natural gas.
luckbox | june 2020
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tactics
ADVANCED
Leg Up on Futures Calendar Spreading Learn the idiosyncrasies of intramarket spreads—trades where an investor simultaneously buys and sells the same futures contract in different expiration months By Michael Gough
62
Spreading crude Each expiration month for crude oil has a different price. (Crude oil term structure as of April 24.)
35 30 25 20
Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building product and professional partnerships. @small_exchange
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spreads. These spreads maintain pure commodity exposure but typically show less than a third of the notional movement of buying (selling) the outright future. This lower volatility requires a smaller initial margin, which results in a greater potential return on capital. Popular products for calendar spreads are corn, wheat, soybeans, crude oil, natural gas and euros because their prices are more sensitive to shifts in supply and demand. To stay engaged with a smaller size, consider futures calendar spreads.
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price between expiration dates. At any point in time, multiple futures contracts are outstanding for a given market. These different prices for each expiration date create a futures’ term structure. Take crude oil, for example, which has contracts expiring roughly every month. Each expiration month has a different price, as depicted in “Spreading crude,” (right). While in this example crude’s term structure is upward sloping (contango) it can also be downward sloping (backwardation) if supply and demand factors shift. This dynamism creates opportunity for traders looking to buy or sell the spread. Consider the July-August calendar spread in crude oil. As of May 1, the July crude oil future was trading for $22.29 per barrel while the August contract was trading for $24.20. This difference in price, typically quoted as front price–back price, equals -1.91. Traders who think the spread will increase can buy it (buy front, sell back). If they think the spread will decrease, they can sell it (sell front, buy back). Similar to pairs trading, calendar spreading helps dampen profit and loss swings as losses in one contract are often offset by gains in the other. Rather than stretch the use-case of an inefficient exchange-traded fund, traders can maintain pure commodity exposure with futures calendar
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rofessional traders seeking commodity exposure often make futures their preferred investment vehicle because of their capital efficiency, exactness in tracking an underlying spot market and deep liquidity. But unlocking the benefits of futures can require serious study because each market has its own distinct contract specifications. Bond futures move in different price increments than stock index futures. Oil futures expire one day and natural gas the other. Gold futures are for 100 troy ounces, while silver futures are for 5,000. Not only are the contracts disparate, they also move significantly more than exchange-traded funds (ETFs), often swinging by as much as thousands of dollars per day. But once traders become familiar with contract nuances, they can scale into using futures with a calendar spread strategy. Futures calendar spreading involves buying and selling different expiration dates of the same market to profit from the difference in rate of movement between near-term and deferred-term futures contracts. It can be a great way to scale into trading futures because the strategy requires lower margin and exhibits less volatility than buying or selling outright futures. Calendar spreading works by taking advantage of futures term structure, the difference in
Learn more about calendar spreads here
In a successful calendar spread, the gains in one leg outweigh the losses from the losing leg. The two basic spreads: Bull Spread: Buy the Nearby / Sell the Deferred Bear Spread: Sell the Nearby / Buy the Deferred
luckbox | june 2020
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tactics
CHEAT SHEET
Delta Force Choose from the many ways to add positive delta to a portfolio
Active Invest or Aler Follow t! @m on Twit ikehart79 ter for daily trading ide and tac as tics.
By Mike Hart and Anton Kulikov
A
contrarian strategy suggests buying into weakness and selling into strength. From that standpoint, the market currently resides in the territory of buying into weakness. To take that approach, know the ways to get long on an underlying. That can also be called adding positive delta to a portfolio. Delta tells which way a position needs to move in order to profit. When delta is positive, the underlying needs to move higher. It’s the opposite when negative. So if the assumption is bullish, an investor needs positive delta. Traders can choose from many ways to
add long delta to a portfolio. The easiest and arguably most efficient way is the purchase of outright stock. That will generate a positive delta of 100 and, regardless of movement of underlying, will remain at 100. That means that if the underlying moves up $1, the position profits by $100. Using options is another way to add positive delta. If a trader is long the stock and sells a 30 delta call against it, she creates what’s known as a covered call. The premium collected from the sale of the call improves basis while adding 70 (100 delta stock - 30 delta call) positive deltas.
Other ways to get long with options include defined-risk strategies such as the short putor long call-spread, or naked strategies such as the short put or long call. The number of long deltas gained by each strategy dictates the risk of the overall position. Recognizing multiple ways to add long delta—and at varying risk tolerances based on delta—allows for greater flexibility when getting long. Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team.
Buy stock, which gives static long delta of 100
Covered call, buy 100 shares of stock, sell 30 delta call
Short put, sell 30 delta
Adding Positive Delta
Short put spread, sell a 30 delta put and buy a 10 delta put
Long call, buy call any delta Debit call spread, buy one strike in-the-money, sell first strike out-of-the-money
june 2020 | luckbox
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LUCKBOX OF THE MONTH
VIRUS-FREE VOYAGING While the world locked down, these passengers spent 15 worry-free weeks aboard a luxury cruiseliner
good luck,” he said. “Of course, for those of us who have children in Spain, we would have preferred to return,” Payá told The Associated Press. “Other passengers, on the other hand, given their old age, wanted to stay on board knowing that the boat was safe and secure.” Payá, a sportswriter traveling with his wife, said when news started to reach the boat of the rapid spread of the coronavirus in their native Spain, their first desire was to go home to their two grown children in their hometown of Valencia. But with ports denying the boat entry, they decided to temper their concerns by enjoying the amenities onboard. He said the passengers’ last chance to touch land was in Perth, Australia, where they docked after “70 wonderful days” of crossing the Atlantic and Pacific Oceans. That was in March when The World Health Organization alerted the world to the pandemic. All 168 Spanish passengers eventually disembarked from the nearly 1,000-foot vessel at Barcelona’s port on April 20 before the ship headed to its final destination of Genoa, Italy, where it let off the remaining passengers. We can’t help but name the Costa Deliziosa passengers this month’s Luckboxes of the Month. These lucky travelers— effectively immune to infection—were sailing into the sunset on a luxury liner, playing shuffleboard and frequenting the buffet while most of the cruise industry was scrambling to protect customers and save face.
The Costa Deliziosa dodged COVID-19 while circumnavigating the globe. Here, the ship arrives in Genoa, Italy, this spring.
Diamond Princess British-registered Diamond Princess, the first cruise ship struck by a major COVID-19 outbreak, was quarantined for a month at Yokohama, Japan, beginning Feb. 4. More than 700 people became infected, and 12 died. At the time, the ship accounted for over half of the reported cases of coronavirus outside of mainland China.
314 oceanic cruise ships were operating at the end of 2018
537,000
Worldwide cruise passenger capacity at the end of 2018 Source: Cruise Market Watch
30 million total ocean cruise passengers worldwide in 2019 64
Cruisin’ for a Bruisin’ Carnival Corp., which controls the largest market share in the cruise industry, saw a major selloff following the COVID-19 outbreak, losing more than 70% year-to-date.
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PHOTOGRAPH: REUTERS/MASSIMO PINCA
T
housands of passengers and crew members have come down with cases of COVID19 aboard cruise ships, but one 12-deck pleasure vessel not only escaped the infection but even became an accidental safe haven from the worldwide pandemic. To the passengers who embarked Jan. 5 on a 15-week around-the-world cruise aboard the Costa Deliziosa, the coronavirus was little more than a news story. It wasn’t until the third leg of the trip in late February that any changes were made to the cruise’s itinerary, prompting visits to the Maldives, Seychelles and Mauritius in place of Japan, Korea, Taiwan and Hong Kong. As an Italian vessel, the ship followed Italian guidelines for social distancing, but because no one on board had a confirmed case of COVID-19, shipboard recreation, socializing and entertainment continued largely unabated during 113 days at sea. The ship eventually began avoiding stops to limit outside contact— barring technical and refueling stops before the journey back toward the Mediterranean. And it turns out that the resulting isolation insulated the ship’s passengers and crew from infection. That means everyone aboard could be counted among the effortlessly lucky. For Spanish traveler Carlos Payá, traveling around-the-globe on a luxury cruise while the rest of the world scurried into their homes for fear of the COVID-19 pandemic was beyond surreal—it was “a stroke of
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