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Nvidia’s Grace Hopper superchip helps run AI workloads.
Courtesy of NVIDIA
The stock market is increasingly difficult to analyze. A few stocks are leading the market higher, and that looks unhealthy.
Consider: The seven most important constituents of
S&P 500 Index
jumped 53% in 2023 versus 0% for the other 493 stocks, David Kostin, chief US equity strategist at Goldman Sachs, recently told clients.
Although the market often speaks loudly, it now seems to have more in common with a black hole than with the Oracle of Delphi. To overcome the lack of transparency, I sought advice from a higher power – something that has excited the entire financial world: artificial intelligence.
I asked ChatGPT to write my column, even though it seemed adulterous and akin to misleading my readers and editors. Surprisingly, the result was satisfying, 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 investing. However, I don’t have access to real-time data or the ability to write specific columns for Barrons or any other publication. The Strike Price column in Barrons is written by Steven M. Sears, financial journalist and author. His expertise and ideas are unique to him, and it would be best to refer directly to his articles for the Striking Price section in Barrons.”
Undeterred, I asked ChatGPT more questions, but never got any real ideas.
He couldn’t tell me if the stock market was buying or selling. He said stocks don’t go up forever, although they do have volatility and periods of decline or stagnation. When asked if it was normal for just a few stocks to rise while the rest of the market remained stable, it generated another broad homily. The same thing happened when I asked ChatGPT if it was better to buy or sell options.
Question after question generated responses you encountered 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 found myself thinking that there was a bigger gap than most people probably realized between the excitement around AI and the reality of AI.
And while we focused last week on a way to trade higher
Nvidia
stocks (ticker: NVDA), we now wonder if it’s only a matter of time before investors start asking harder questions about AI.
Investors looking to hedge against the downside — Nvidia stock is up about 27% since late May and 165% this year — might consider a so-called bearish spread. The strategy, which involves buying a put option and selling another with a lower strike price but a similar expiration, is designed to increase in value when the stock falls. It is used when a stock is abnormally expensive and its options are expensive and have high implied volatility. (Put options give the holder the right to sell an underlying asset at a specific price and time.)
With Nvidia at $386.54, investors who doubt that AI-related stocks won’t stay in a parabolic uptrend might consider buying the August put at $375 and selling the August put. August at $320. The spread recently cost around $15.20.
If the stock is $320 or lower at August expiry, the bearish spread is worth a maximum of $55. Of course, if the stock continues to move higher – or even if it doesn’t fall below $375 at expiration – the trade will fail.
Some might say that playing the bearish side of the idea last week lacks imagination, 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 company specializing in asset management. Neither he nor the company has a position in the options or the underlying securities mentioned in this column.
E-mail: editors@barrons.com