The stock market is becoming increasingly difficult to analyze. Some stocks are leading the market higher, and that seems unhealthy.
Consider: The seven biggest voters in the
S&P 500 index
are up 53% in 2023, compared to 0% for the other 493 stocks, David Kostin, chief US equities strategist at Goldman Sachs, recently told clients.
Although the market often speaks loudly, it now seems to have more to do with a black hole than the Oracle at Delphi. To overcome the lack of transparency, I sought advice from a higher power – on something that the entire financial world is excited about: artificial intelligence.
I asked ChatGPT to write my column even though it felt adulterous and amounted to betraying my readers and editors. Surprisingly, the result was satisfactory – in an unexpected way.
“As an AI language model,” ChatGPT told me, “I can generate text based on prompts and provide information on various topics, including finance and investments.” However, I don't have access to real-time data or the ability to write specific columns for it Barrons or any other publication. The “Available Price” column in Barrons was written by Steven M. Sears, a financial journalist and author. His expertise and insights are unique to him and it would be best to link directly to his articles for the Striking Price column Barrons.”
Undeterred, I asked ChatGPT more questions but never got any real insights.
It couldn't tell me if the exchange was a buy or a sell. It states that stocks do not go up forever, although they do experience volatility and periods of decline or stagnation. When asked if it was normal for only a few stocks to gain while the rest of the market stagnated, this prompted another round of widespread praise. The same thing happened when I asked ChatGPT if it was better to buy or sell options.
Question after question produced answers that one would get from someone who had mastered the ability to speak without saying much. At the end of my failed attempt to have an intellectual exchange with ChatGPT, I came to the conclusion that there is a bigger gap between the enthusiasm for AI and the reality of AI than most people probably realized.
And while last week we focused on an opportunity to trade bullishly
Equities (ticker: NVDA), we now wonder if it's just a matter of time before investors start asking tougher questions about AI.
Investors looking to hedge against downside risk — Nvidia stock is up about 27% since late May and up 165% this year — might consider a bear spread. The strategy — which consists of buying one put option and selling another with a lower strike but a similar expiration date — is designed to add value when stock prices fall. It is used when a stock is unusually expensive and its options are expensive and have high implied volatility. (Puts give the holder the right to sell an underlying asset at a specified price and time.)
With Nvidia at $386.54, investors concerned that AI-related stocks won't remain in a parabolic uptrend might consider buying the August put at $375 and selling the August put from $320 consider. The spread last cost around $15.20.
If the stock trades at $320 or below by August expiration, the bear spread is worth a maximum of $55. Of course, if the stock keeps climbing — or even if it doesn't drop below $375 at expiration — the trade will fail.
Some might say there's a lack of imagination, playing down the negative side of last week's idea, but there doesn't seem to be much reward for imagination in the markets lately.
Steven M. Sears is President and Chief Operating Officer of Options Solutions, a specialty asset management firm. Neither he nor the Company has any position in any of the options or underlying securities mentioned in this column.
E-mail: [email protected]