An Option Trader’s AI-Powered Playgro und

An Option Trader’s AI-Powered Playground

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By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

The president is doing everything but firing Jerome Powell…

Here are some pretty pointed remarks from the White House lawn on Wednesday, from CNBC:

In his latest in a series of attacks on Powell that go back years, Trump said the Fed’s key borrowing rate should be at least 2 percentage points lower.

“So we have a stupid person. Frankly, you probably won’t cut today,” Trump said in impromptu remarks just outside the White House. “Europe had 10 cuts, and we had none. And I guess he’s a political guy, I don’t know. He’s a political guy who’s not a smart person, but he’s costing the country a fortune.”

[…]

“If he’s worried about inflation, that’s OK. I understand that. I don’t think there’s going to be any. So far there hasn’t,” Trump said.

I understand the president’s frustration. The high-rate regime is costing the federal government a fortune in interest expenses, now infamously a higher sum than the defense budget.

But to call Federal Reserve Chair Jerome Powell stupid is only half right.

The immediate pandemic response was arguably stupid, with trillions in new dollars inevitably causing inflation and the worse debasement of the U.S. dollar in many years.

Waiting to address the inflation, calling it “transitory,” was pretty stupid too… and likely led to it getting out of hand.

But most everything since then has been close to the opposite of stupid.

Powell managed to lead the economy out of high inflation with the biggest interest rate hiking campaign since Paul Volcker… and not tip the economy into explicit recession.

He’s made the United States a positive anomaly on the world stage, with an economy that continues to be robust and a labor market that, with some hang-ups, is in remarkably good shape despite far fewer rate cuts than the rest of the developed world.

It’s hard to be bearish on Powell right now. He has kept to the Fed’s dual mandate with great discipline, while largely rejecting the pressures of the third, hidden mandate – keeping the U.S. government solvent – for fear of compromising his first two.

But I digress…

The Fed decision was, as predicted, to not budge interest rates an inch.

Fed officials still project 50 basis points in cuts this year, bringing the key rate down to a range of 375-400. That’s one-fourth the amount of cuts President Donald Trump is asking for to happen right now.

And traders expect to see the first 25-point cut come September:

Again, though, rate-cut-starved investors should be careful what they wish for.

Rate cuts are a sign that the economy needs support. So long as inflation is relatively low and employment is high, the only other good reason to cut interest rates is to help the government deal with its spending problem.

But one does not have to look far to see how well the U.S. economy has handled high rates. The bull market we’re in now started months before the Fed’s rate-hiking campaign peaked in September 2023. Corporate bond issuance is still rising at these elevated rates, up 1.2% over the last year, showing that corporations are still happy to borrow money from investors.

Not to mention, American savers are still able to get the highest risk-free real rate on their money since 2007:

The fact is, high rates have been good for just about everyone except the government.

That’s the only place this pressure is coming from, and it probably won’t be enough to sway a Fed that’s clearly committed to keeping things in order.

Shifting gears, let’s look at some stocks on win streaks right now…

You’ve probably noticed that the S&P 500 has gone a whole lot of nowhere over the past five days. The chop has been agonizing, with the SPDR S&P 500 ETF (SPY) trading in a tight range of less than 1.5% in this span.

During times like these, I always like to find stocks on long, strong win streaks.

These are the names with high relative strength, bucking the sideways trend. They’re names you want to focus on.

It shouldn’t surprise us to learn that a bunch of energy stocks make the top of the rankings. Marathon Petroleum (MPC) is on a nine-day win streak. Chevron (CVX), Phillips 66 (PSX), and Exxon Mobil ( XOM) have all made eight-day win streaks. (Disclosure, I own XOM at time of writing.)

You might hear that and think it’s too late to jump on the energy train. That could be true, especially if the Israel/U.S. vs. Iran fight finishes before it starts. But there’s also solid evidence that long win streaks in certain energy stocks are nothing to be feared.

Here’s the results assuming you bought and held each of the above stocks for 21 trading days after they’ve put on eight-day win streaks:

This is a rare event we’re testing here. It may not look so rare for Chevron until you realize that stock has been public since 1921 and this backtest goes back to 1950.

Nonetheless, MPC has a very strong track record here for a company that’s only been public since 2011. An eight-day win streak has happened seven times in the company’s history. On average, the stock is positive 100% of the time a month later, with the average return (counting wins and losses) at 7.64%.

7.64% is a great one-month return on a mid- to large-cap energy stock. Sounds like the kind of thing you could leverage well with options.

As we’ve said time and again, long win streaks are generally not something to fear in the broad market. Investors do tend to prefer buying over selling, after all.

If you want to trade options, might I make a recommendation…

TradeSmith is home to plenty of different options trading tools, all designed to help you take advantage of volatility.

Our Constant Cash Flow algorithm, and accompanying advisory helmed by our own Mike Burnick, helps you spot the best income opportunities in the options market.

Infinite Income Loop shows you how to compound options income plays, week after week, while reducing your risk.

Our Options360 software suite offers a robust options analysis tool and screener that’s constantly evolving – including a new Fair Value tool to help you find mispriced opportunities that we’re set to release soon.

(I’m not entirely sure I should be showing this to you, but I’ll ask forgiveness rather than permission. Here’s an early look at the Fair Value tool on Palantir Technologies (PLTR) for the July monthly expiration. The red icons show up because it’s an “internal release” – still a work in progress.)

Point is, there’s a lot to be excited about for option traders who use our software.

But even all this pales in comparison to what we’re about to release.

Next week comes the launch of the brand-new Predictive Alpha Options.

This toolset, an extension of the Predictive Alpha Prime update from earlier this year, shows you the right options strategy to use based on a stock’s underlying volatility, as well as its Prime Projection.

The best way to show you is with the software itself. Here’s PLTR again, only this time in the all-new Predictive Alpha Options:

This tool shows us a few pieces of valuable info.

One is the Prime Projection Date and Target. By July 17, Predictive Alpha Prime projects PLTR to be almost 13% higher than it is today.

The Volatility Score shows us how cheap or expensive options are relative to recent history. Anywhere from 0 to 40, we consider options “cheap.” With PLTR projected to be higher by July 17, we expect buying call options is the best strategy.

Finally, the blue check mark under Correlation confirms that PLTR’s Predictive Alpha Options Trend Zone (Bullish, at left) and the Prime projection are moving in the same direction. This correlation lends even more confidence to the trade.

So, buying call options on PLTR based on all these pieces of information is a high-odds move right now. And of course, subscribers will get a precise option recommendation by clicking that button on the right-hand side.

But I want to talk about one more important aspect of this new tool, which makes the game of options trading so much easier…

We’ve created an “option trader’s index”…

In our research, we’ve found that the top 10% of stocks with the highest historical accuracy rating in Predictive Alpha Prime make for the best-of-the-best options trades.

That means the Prime algorithm has been right about the price projections for all of these stocks more than any other.

In a sense, we’ve created an index of the best stocks to trade options on.

It’s a veritable AI-powered playground for options traders.

And in the coming days, all of our Predictive Alpha Options and Platinum subscribers will get access to this new basket, as well as all of the software upgrades I showed you above, completely free.

Just like Predictive Alpha Prime was a game-changer for stock trading, this is a game changer for options trading.

We’re continually harnessing the power of AI here at TradeSmith to empower you to make smarter, higher-odds bets every day the market is open.

And next week, we’re opening the doors to new members of Predictive Alpha Options to start taking advantage of this powerful, self-reinforcing AI projection model for themselves.

If you want to make the most of the volatility we’re likely to keep seeing this year, you should make a point to attend our launch event next week.

Sign up here, and you’ll get access to a lite version of the new Predictive Alpha Options tool so you can see firsthand just how useful it can be.

Full details at this link.

To building wealth beyond measure,

Michael Salvatore
Editor, TradeSmith Daily