MARKET WRAP

Stocks hit new highs yesterday, but the final two hours saw some volatility after the FOMC minutes were released, followed by a drop in PLTR and other defense stocks on concerns over potential Pentagon spending cuts. That weakness carried into this morning. However, the market once again showed a little resilience, grinding higher off the morning lows. By the end of the day, the SPX finished -0.4% (it was down -0.8% earlier) and QQQ -0.5%. Yields weren’t a major driver, with the US10Y yield slightly lower, now at 4.51%. Despite that, rate sensitive IWM was down -0.9%. DJIA (-1%) was the biggest loser on WMT’s 6.5% decline. The VIX had a muted response, closing at 15.65. (more on low IV and potential hedges below). Tomorrow is monthly options. Carter Worth joins today’s MRKT Call to talk Chinese stocks and more. On today’s RiskReversal Pod, Dan is joined by Imran Khan, CIO and founder of Proem Asset Management. Enjoy!

MRKT MATRIX: February 20, 2025

Today’s Top Stories:

• Dow tumbles 500 points, S&P 500 retreats from record as Walmart forecast raises concern about earnings (CNBC)

• Walmart Profit Forecast Falls Short on Slowing Growth (Bloomberg)

• Palantir gets a buy rating from Loop Capital, which calls for more than 25% upside (CNBC)

• Bank of America says the S&P 500, expensive by nearly every metric, still has one way to move higher (CNBC)

• Keep buying the dip as market gains broaden beyond ‘Magnificent Seven,’ Citi says (CNBC)

• Trump’s First Month Has Traders Ditching America-First Wagers (Bloomberg)

• Bessent Says US ‘Long Way’ From Boosting Longer-Term Debt Sales (Bloomberg)

• The 45 Companies on the MAGA Anti-DEI Hit List (Bloomberg)

Today’s MRKT Call is Presented by CME Group

Chart Check on S&P, Banks, WMT, China & PLTR

Dan and Guy begin by discussing the move lower in equities today, but also the possible warnings signs via the sharp moves lower in some stocks. Carter joins and dives right into Chinese stocks with the Hang Seng chart into some questions from Dan on the BABA chart. An audience question on BIDU. Following charting with Carter, Dan and Guy discuss the move lower in the bank stocks today, with a close look at JPM. Then a look at the carry over from WMT’s earnings move, taking retail stocskd own with it and a closer look at HD which reports next week. Call of the Day focuses on PLTR, valuation, the chart and the large move lower the past two days. Next, a reversal in some of the new meme stocks like APP, with a comparison to SNOW’s reversal lower. Finally, a look at the recent price action in TSLA.

Click here to access all of the charts mentioned in today’s MRKT Call.

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Today’s RiskReversal Podcast is Presented by Betterment and RBC

Imran Khan's 2025 Investing Playbook: Macro Trends, CapEx Cycles & Generative AI

Dan Nathan is joined by Imran Khan, CIO and founder of Proem Asset Management. They delve into key topics affecting the market such as the impact of geopolitics on investment processes, the concentration in the S&P 500, and future opportunities in 2025. Imran also shares insights on deregulation, trade wars, and corporate taxes, and their bearing on the economy. The discussion finishes with an exploration of generative AI trends, the productivity potential of new technologies, and potential investment opportunities within and beyond the large-cap tech giants.

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What’s Next?

Tomorrow is February monthly options expiration. The nearby levels for potential pins to watch are 6100 to the downside, and 6150 to the upside. The expected move is about 0.4%. which is about 6090 to 6140. Monthly expirations are always large, but tomorrow’s is smaller than some of the historic sized expirations we’ve seen the past few months. Looking out on the calendar, March’s quarterly expiration is more significant..

As noted recently, there’s notable overhead supply in the SPX options market around the 6150 to 6200 range that could act as a bit of a buffer to market gains near term. This supply won’t ease much after tomorrow’s expiry and persists deep into March. The past two days the market paused just below that zone. Meanwhile, implied volatility in index options remains exceptionally low. In these situations, it can be useful to look to the downside and possibly consider inexpensive downside protection—hedges that don’t cost much but still allow you to perhaps trade minor pullbacks, knowing you have coverage just below in case things get uglier. If things did get ugly, the price paid would expand quickly allowing for optionality of buying stocks, rolling the hedge lower, etc.

Possible SPY Hedge – March 31 Expiration

This options trade is designed as an inexpensive hedge against a moderate market decline in SPY while allowing flexibility to stay engaged on small pullbacks or if the market continues higher. It provides protection from a ~2% to ~7% downside move from current SPY levels, with limited cost if the market remains strong.

Trade Structure:

• Buy 1x SPY March 31st 595 Put for ~ 4.70

• Sell 1x SPY March 31st 565 Put at ~ 1.70

• Total Cost: $3

• Potential Gain / Protection: $27

Rationale:

• This is a simple put spread designed to hedge against a meaningful but not extreme decline.

• It offers protection between 595 (~2.5% below current levels) and 565 (~7.5% lower), covering a typical correction range without overpaying for close-to-the-money protection.

• Since it’s a spread, the cost is reduced compared to buying puts outright, making it inexpensive enough that if SPY continues to bounce or makes new highs, the trade won't result in a significant drag on returns.

• The low cost also means you can still participate in buying small dips with a bit of protection in case that dip turns into a more meaningful correction.

• The trade is fairly short term, and if we did see a decline near term (following NVDA’s earnings for example)  it could easily be rolled at a profit farther down and out in time while potentially booking some profits on the hedge. Roughly speaking, if SPY was 575 after the first week of March, this would be trading somewhere around $14 dollars.

Trade Goals:

• Provides downside protection in case of a larger pullback.

• Limits loss to the premium paid.

• If SPY holds recent bounce levels or moves higher, the low cost can have minimal impact.

Dependent on your portfolio, this strategy may strike a balance between low cost and staying engaged in the market.

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