Dear Reader,
Yesterday, the Fed surprised markets with a half-point cut to interest rates, rather than the quarter-point cut the markets expected.
Make no mistake, this is a big deal.
A quarter-point cut was baked in. A half-point cut could kick the markets – and a specific group of stocks – into high gear.
I’m talking about artificial intelligence.
And you might be asking why AI stocks specifically are going to respond well to lower rates…
Remember, big tech companies (like those that make up the Magnificent 7) took it on the chin when interest rates started climbing.
That’s because many of the tech companies in the world came of age in a zero-interest rate environment. For nearly a decade, companies like Meta Platforms Inc. (META) and Alphabet Inc. (GOOGL) secured market dominance with a seemingly endless supply of cheap capital.
The bigger-than-expected rate cut, with more cuts coming before the end of the year, is likely going to spur borrowing to support AI projects.
It’s going to be an arms race, backed by billions in loans from the world’s biggest banks.
So today, I want to keep our focus on AI stocks, and show you just how lucrative it can be to trade them the way I do – especially with the bullishness I see coming.
To do that, I’ll walk you through a trade I recommended to my Timed Trader Pro readers.
And after that, I’ll give you three different ways to play one of the biggest AI stocks in the market – right now.
Let’s get started…
Case Study: Amazon.com Inc. (AMZN)
Amazon.com Inc. (AMZN), the world’s leading e-commerce company.
But if you think that’s all Amazon is, you’re dead wrong. The company has been at the forefront of AI development for years now, with contributions like…
Amazon Web Services (AWS) AI and Machine Learning
Amazon Web Services (AWS) provides a comprehensive suite of AI and machine learning tools to developers and companies, including its machine learning platform SageMaker, the text-to-speech platform Polly, and Lex, the same tech behind Alexa, which allows businesses to build their own voice-based applications.
Alexa
Speaking of Amazon’s voice assistant, Alexa is powered by advanced natural language processing (NLP) and machine learning algorithms. Alexa’s AI continuously improves its understanding of language, learns from user interactions, and integrates with smart home devices.
AI for Supply Chain and Logistics
Amazon’s supply chain optimization uses AI to forecast demand, manage inventory, and optimize delivery routes. By predicting trends and adjusting its logistics network, Amazon ensures that products reach customers faster. AI is also applied to automate sorting facilities and optimize delivery schedules.
Those are just a few highlights – but make no mistake, Amazon’s work in AI is vast and expanding into nearly every part of their business.
But the best thing about Amazon was the 90% historical pattern detected by my Money Calendar…
This Move Has Happened 90% of the Time in the Last Decade
Back on May 20, Money Calendar alerted me to a 90% pattern on Amazon at a time when it was also showing seasonal bullishness (despite the adage “Sell in May and go away”).
Not only were markets bullish, according to the Money Calendar, the patterns Money Calendar was spotting were more than 90%+ bullish. Take a look…
The very best pattern was on AI leader Amazon.
For nine of the last 10 years, from May 20 to June 28, hadmade an average move of $6.28 per share to the upside.
Every year but 2017, Amazon stock has moved higher between these dates over the last decade. What’s more, the pattern has gotten stronger in recent years, giving us a much higher probability of success.
Here’s what I told my Timed Trader Pro readers at the time:
This pattern alone is powerful. But given the bullish nature of the current month, and the market’s continued push into Artificial Intelligence, we could be looking at a double in just over a month.
Now, remember. Amazon is a big expensive stock – so the options carry a lot of price risk. And it’s very difficult to make a directional trade on a stock like AMZN for less than $500.
But if you know anything about me, you know that I want to keep my risk below that $500 mark with every trade.
So for our Amazon recommendation, we executed a “Loophole Trade.”
Our AMZN Loophole Trade
For a quick refresh: The Loophole Trade is otherwise known as a vertical debit spread.
For our bullish pattern on AMZN, we initiated a call debit spread. That means we bought an option we at the strike price we like, while selling an additional option at a higher strike price to offset the cost and bring down our risk.
As expiration approaches, the lower-strike option increases in value while the higher-strike option decreases in value. The value of the difference is how we profit.
To close out the trade, we sell the lower-strike option for more than we paid for it, buy back the higher-strike option for less than we sold it for, and pocket the difference.
The best part of the Loophole Trade is that it lowers your risk without capping your gains – so you can still aim for triple-digit returns with every trade.
So on May 20, here’s what I recommended…
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Action to take: Buy-to-open the AMZN June 28, 2024, $185 Call, and on the same order ticket, sell-to-open the AMZN June 28, 2024, $190 Call for a limit of $2.20 or better. Enter as a good-till-canceled (GTC) order to be canceled if not filled by the end of the week (Friday, May 24). Once filled, place an order to close the position at 100% (twice the amount you paid). |
(If you need a refresher on the Loophole Trade, check out my special report, How to Double Your Money on the World’s Most Expensive Companies (While Risking Just $500 or Less.)
Just as we planned, the value of our spread increased as the $185 call rose in value over the next few weeks, and the $190 call declined in value.
Heading into expiration, however, the $185 call stalled as time decay began to accelerate.
Now, as traders, this gave us a choice: we could stay in the trade, hoping to hit our 100% target before expiration… or we could take the money and run.
You might think I’m going to tell you to “stick to our plan” and hold the position until we reach 100% gains.
But I didn’t get where I am by being stupid.
Here’s the thing. The acceleration of time decay is measured by the options Greek Theta.
The higher the Theta, the faster the option is losing value.
Most options contracts expire worthless for exactly this reason – they just run out of time to make a move.
So instead of risking our gains to squeeze a little extra out of this trade, we took a 74% profit on our AMZN call debit spread in just over a month.
Right now, I’m seeing another 90% pattern in another massive AI stock – and I want to share it with you.
This time, we’re looking at Nvidia Corp. (NVDA).
NVDA Three Ways
There’s a bullish Money Calendar pattern on AI chipmaker Nvidia
For 9 of the last 10 years, NVDA stock has gone up between September 23 and November 4.
There are three ways to play this.
First: You could go long and buy the stock. At the time of this writing NVDA is trading at $119 – so 100 shares will run you around $11,900 as of this writing.
You’d simply sell on the close of the last day of the pattern, November 4.
This option carries the most risk in terms of your cost.
Second: You could go long by buying a call option.
An at-the-money call option (meaning it is the same or close to the stock price) that expires after the end of the pattern (the November 15 expiration) is going to run you about $9.50-$10.00 ($950 to $1000).
That’s still more risk than I like.
Third: You can use a Loophole Trade to lower your risk.
So when you buy that at-the-money call with a November 15 expiration, you sell-to-open an out-of-the money call option on the same order ticket.
This brings in premium, reducing your cost and your risk. It also raises the probability of the trade being successful, but does limit your upside potential.
But you can still shoot for 100% gains.
Right now, the 5-point at-the-money call debit spread is trading around $2.50 per contract, while the 10-point at-the-money spread will cost you around $4.25 per contract.
That’s all for today, but I’ll be back with you tomorrow for the Friday Mailbag.
And since we’ve been focusing on AI stocks this week, I’ll be answering your biggest questions surrounding the Magnificent 7, what’s going on in the industry, and what to expect from this group of stocks in the next few months.
Send your questions right here.
Good trading,
Tom Gentile
America’s Pattern Trader