Opportunities Ahead as Rate Cuts Come into Focus By Larry Benedict, editor, The Opportunistic Trader We have two trades expiring today… The first is a put option on Invesco QQQ Trust Series 1 (QQQ) that we opened on August 6. The other is the remaining half position on Nvidia (NVDA), which we opened on August 12. We closed out the first half of the NVDA position back on August 28 for a 70.4% loss. Unfortunately, the move we’d hoped for just hasn’t come for either trade, so I’m expecting both to expire worthless. Any loss is disappointing. As I wrote earlier this month, it can be a trade-off when a position moves against you quickly. That often means the option is trading at just a fraction of its original value. So the trade turns into an asymmetrical bet. If you close the trade out, you don’t recoup much premium at all and lock in a big loss. On the other hand, if you let the trade run, you could recover some capital if the stock breaks out in the desired direction. We held on to these two trades in the expectation that QQQ and NVDA might still turn around. But when we make that call, we know that a max loss is always possible. That’s why I always tell you to choose your position size carefully with each trade. A big benefit of trading options is that we always know the maximum potential loss before we enter the trade. It’s the amount of premium we pay to enter the trade. That enables us to control our risk tightly by choosing a position size we’re comfortable with. Plus, keep in mind that options allow us to gain exposure to a move in the underlying stock for a fraction of the cost of trading the underlying shares. Trading 100 shares of NVDA, for example, would take upward of $13,000 at present. Whereas we opened our put trade on NVDA for $4.15 (or $415 per contract). As always, if you have any questions or concerns, let me know at feedback@opportunistictrader.com. Now, let’s turn to an update on our United States Oil Fund (USO) trade. The oil price has been moving a lot lately… Oil Price Remains Volatile Our USO put trade has been buffeted around since we opened it a month ago. After initially rallying against our position, USO retraced sharply. The Relative Strength Index (RSI) reversed lower off of resistance. That sent our position into profit. But that move proved to be short-lived… United States Oil Fund (USO) 
Source: eSignal (Click here to expand image) Late last month, USO rallied sharply again off escalations of the war in the Middle East and news about the potential bombing of Iranian oil sites. Those risks have receded for now. And USO reversed and gapped lower. It’s now trading back around where we entered the trade. That has improved our position, but time decay has taken a toll. The RSI only recently broke into its lower band (below the green line). So I’ll be looking for it to gain traction and push our trade back into the green. I’m watching this – and all our other open trades – closely and will reach out if you need to take any action. Pressure on the Fed The huge rally in stocks kicked off almost 12 months ago now, led by AI and tech stocks. The prospect of rate cuts spurred much of the excitement. That rally was strongly tested in July, though, when the market retraced sharply. That down move culminated with the abrupt dip on August 5. Since then, stocks have been clawing higher. The S&P 500 recently traded again at all-time highs. The Fed’s confirmation in August that it was ready to start cutting rates fuelled part of that move. Then we got the bigger 0.5% cut at its September meeting when the market was expecting just 0.25%. But now there are just two Fed meetings left before the end of 2024. And speculation is growing about the number and size of future cuts. Since announcing the 0.5% cut, the Fed has seen a steady flow of economic news that could force it to pause or reduce the number of cuts. These data points include a rebound in the jobs market (along with falling unemployment) and a recent increase in inflation. And yesterday, we got a bounce back in retail sales (up 0.4% month over month). That was 0.1% above forecasts and 0.3% above last month’s reading. Now, retail sales data can move around. Yet it shows that consumers are confident and spending. And the economy remains strong. That’s not the sort of environment where the Fed would typically cut rates back to back. That’s especially true with stocks performing strongly (and the S&P 500 at new highs). I’m still expecting another 0.25% cut this year, but that cut could come in December. So the series of interest rate cuts the markets had already factored in might start to unwind. That could lead to volatility if expectations are upset. The election is also looming… Whichever way the election result goes, we’ll likely face further inflationary pressure. It could be via tariffs on imports or another round of big-spending government programs. That’s setting us up for swings that will roll from here into next year – and generate great trading opportunities. So stay tuned as we adapt to these evolving conditions… Happy Trading, Larry Benedict
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