From the Chicago Bears to the Chicago Board of Options Exchange

In the latest episode of the Interactive Brokers Podcast, Jon Najarian shares insights on market dynamics, trading strategies, and the geopolitical implications for global markets, emphasizing the importance of strategic options trading and the potential of undervalued Chinese stocks like Alibaba.

Summary – IBKR Podcasts Ep. 178

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jose Torres 

Hello, everyone, and welcome to Interactive Brokers Podcast, IBKR. I’m Jose Torres, your Senior Economist. Today, I’m with Jon Najarian. Jon Najarian was a professional football player before becoming a trader, venture capitalist, television star, and fintech visionary. 

Jon played for the Chicago Bears, before becoming a trader and eventually a board member of the Chicago Board Options Exchange from the Bears to the Chicago Board of Trade. You have got to love it. Chicago baby! He sold Mercury trading his prop trading firm to Citadel in 2004. Jon and his brother Pete, then Built Trade Monster into a financial giant selling for $750 million in 2016. They’ve since built Market Rebellion into an educational and subscription business that has educated over 300,000 investors since 2017. 

Jon has earned a reputation in the industry as an options trading expert and pioneer. He developed and patented trading applications and algorithms used to identify unusual activity in stock options and futures. Jon and Pete can be seen weekly on Fox Business and Market Rebellion’s exclusive regularly scheduled shows on Market Rebellion TV. 

But today, Jon is here on IBKR podcasts. Jon Najarian, welcome to the program.  

Jon Najarian 

Each other had said on stage, it was not the usual just gobbledygook that some people, repurpose at every event. It’s really nice to be with you, Jose. Thank you for your patience, and to the whole IBKR crew. Thank you, guys and gals. 

Jose Torres 

Quick story, when I was younger, you’d always come on TV. You and Pete, and you talk about the PICs and we’d always be like, And today we’re going to be watching, oh, there’s Jon and Pete. Now what is he going to talk about? Which calls are we going to buy? Which strike? Which short strike are we going to pick when we’re doing a bull call spread? 

And, been watching you for a long time and it’s great. 

We’re going to get into market conditions right away actually. So, the market has been really making all-time highs pretty much every week, every other week. Absent that, excluding that period in April, we got a 5-6% sell off. 

Where do we go from here, Jon? 

Jon Najarian 

It’s a great question. Of course, it’s one we find, especially millennials are probably really struggling to buy into the market or perhaps add to their positions at all-time highs. That’s a tough thing to do. I agree. 

It’s one of the reasons why people like Jose and many of you who trade options, can get into the exposure that you want from NVIDIA, from Broadcom, from Microsoft, these stocks that are now in the trillions of dollars, do they have a bright future? I believe they do. Will they have corrections like NVIDIA just had a 12 percent correction? Yes, they will. Everybody does.  

But doing it with options, folks, I’m not just some guy that trades options a lot. I really do believe that if you define your risk on entry, which you can do with options, you can turn it into a great tool to manage risk. To enhance your returns. 

Doesn’t mean it has to be the only tool in your toolbox, but it certainly should be one that you understand and then at appropriate times, you use that tool. Your question, Jose, was where do we go from here? I think we get some volatility, of course, We’ve got two days from now we’re going to get some volatility, folks, because we’ve got a presidential debate, and depending how the sitting president does in that debate, he could be replaced. 

I’m not saying that my view of politics needs to be your view, I’m just saying if he doesn’t come out strong enough, I think there’s definitely a wing of his party that doesn’t want him running if he can’t stay on the stage with former President Trump. So that’s a bit of volatility that’ll be injected into the markets. 

On Friday, we’ve got a PCE report coming out that’ll describe how much inflation is affecting me and you on a daily basis, monthly basis. This will be, of course, the May PCE. 

I think we’ve got a couple events this week that are going to cause the VIX to lift a little bit higher. For those of you who are premium collectors, that’s a good thing. To move Jose’s question a little further down the road, do I think that this means that we have to see a 20% correction in the market? No. I think the Fed is going to give us a cut in September and I think they’re going to be done at that point. 

But I think there can be volatility between here and September and most of it is the short term is based on these two events this week. 

Jose Torres 

Thanks, Jon. Another thing that could drive some volatility, the geopolitical front, Jon, has been quiet in the last few weeks. We’re starting to pick up a little bit just recently, maybe in the last seven days or so. We are taping this on June 25th and we’re watching oil, Jon, because, when oil was at $92-$93 back in October, that corresponded with a 10 year at 5%. 

And the S&P at 4,100. Meanwhile, today we are at almost at 5,500. Some of us we are valuation sensitive, and we have a parameter of thinking where 15x earnings is generally on the cheaper side and 22x is generally on the expensive side.  

Now we’re at around 22x, 5,500 on the S&P and 250 in earnings in the next 12 months roughly. It’s lofty, and many of our customers have been waiting for this volatility, but last year was a double-digit year. This year we’re already up 15% and we’re not even at halftime yet. Wondering if the bears will get a reprieve. 

Jon Najarian 

They certainly have, with a few exceptions here and there. The bears have feasted, of course, on some of the stocks that were darlings during the pandemic. Believe it or not, there’s a lot of reverse stock splits coming our way, folks. I know many of you have, of course, applauded, as I do, things like regular stock splits.  

A traditional stock split very quickly is like what NVIDIA or Broadcom have just announced. They both said, we’ll do 10 for 1, which means you’ll get 10 times as many shares as you have right now at one tenth of the price. Nothing really changed about the company. But some things may have changed in terms of my access, Jose’s access, all of your access to the market for that stock. 

Because quite frankly when NVIDIA is $120 a share, it’s a lot easier to trade than when it’s $1,200 a share. So, it’s understandable even though it’s not a guarantee that the market always goes up when they split a stock. 

It does not. But frequently, the access to the markets, the access to hedging, for those of you who are option traders obviously at $1,200 a share, you almost have to be an options trader, because 1,000 shares are $1.2 million. It is crazy!  

But, at $120. That’s still a lot of money, but now it’s $120,000 for a 1,000-share position. It doesn’t force as many people into option trades as it does when it’s significantly higher. Just really quick, I would say a stock like Virgin Galactic is below a dollar, well below a dollar. And they’re going to do an inverse or a reverse stock split. And in that case, what they’re trying to do is stay relevant number one. Number two, stay on listed or lit exchanges, because if they go below a certain price point, folks, they get kicked off the exchange. Now that’s not an overnight thing. They have a certain number of days to fix that. This stock was $70-$80 a share. Now it’s below a dollar. Why is that? 

I guess not as many of us want to go up and go to the edge of space as they hoped. They’ve had a lot of delays and all the rest. We could go into the fundamentals for the stock, but I think the big deal right here, Jose, is that in order to stay listed on the NASDAQ, New York, wherever it is listed, they need to get back above, I believe, $5. 

So, the board has okayed one for 30 reverse stock splits. So, in that case, instead of getting 10x as many shares at one tenth the price. In this case, you’re going to get 1/30 of the number of shares that you have right now, but there’ll be 30x the price of the stock. So obviously if it was a 30-cent stock, it’ll push it back up to $9 instead of 0. 30 and so forth. And you’ll only have 1/30 as many shares. These kinds of things are desperate moves you rarely see. I could give you a couple examples, obviously. Citigroup and Bank of America, after the financial crisis, they did reverse stock splits because they wanted to stay relevant and they knew at some of the prices that they were trading at, they’re just not on people’s radars anymore. 

By the way, some firms and some institutions, and some endowments have mandates that they must only trade stocks that are over a certain price point. Usually that’s about $5 as well. So, there’s a lot going on with all of the things that we focus on as traders and investors. 

Some of them are really good and some of them financial engineering and so forth. And I’d say the Virgin Galactic example is financial engineering, whereas the other is really, nothing really changed with Avago or Broadcom or Nvidia, but it made the access to those companies much more democratized. 

Jose Torres 

I thought that was an interesting point, Jon, and, Apple had a lot of financial engineering going on, too. You saw it split, then it was flat for a long time, then organic earnings and revenues haven’t really grown, so then they used a buyback. So pretty much transferring the cash from the balance sheet to boost EPS. That was one that I’ve been watching for quite some time. Now I want to move over to options expiration.  

Last Friday, we had a record $5.5 trillion. For the first time in a while, we saw folks they didn’t buy back their Nvidia calls, their short calls, those long investors that had short calls against Nvidia. 

They just let folks take away their shares. Then we saw the price decline pretty significantly now, roughly 13% off of recent highs. The question everyone’s asking themselves, and I know you addressed it in your Market Rebellion newsletter yesterday is can this market broaden out? Can it survive without NVIDIA? 

Jon Najarian 

I think it can. I think the market could survive without any of these trillion-dollar stocks moving in a positive way to the upside. But to this point, there has been so much put into whether we want to call it artificial intelligence, machine learning, whatever it might be, because I don’t know that it’s really intelligence yet. 

I think we’ll get there. There’s certainly a lot of opportunity in the space. Broadcom was just one of the more recent examples, anybody that can is throwing AI into the mix. I saw Accenture. Throw it into the mix. And they said they’ve already got $900 million worth of bookings for people that want to understand how their business could be using artificial intelligence or AI to help them become more profitable, streamline the business, perhaps. 

I think a lot of it is going to be things like that. So, when they pass the baton, if you will, to some of the other places Musk has already forced that by saying, you know what? I’m buying Dell and Supermicro Computer because I need the racks for my data centers, for my XAI, which is of course yet another, I’m sure, soon to be trillion-dollar company from Elon Musk. 

I think there’s going to be that passing of the baton into the chips because Broadcom designs chips. They don’t manufacture them, folks. Broadcom designs chips. Micron makes dynamic random-access-memory. Arm Holdings makes chips. That’s not to put NVIDIA down. They’re doing magnificent work because they have brilliant engineers and they design these chips, some of which sell for as much as $40,000 for a chip. Taiwan Semi is going to continue to do really well because of that.  

But I think overall, when I look at that baton being passed, I think of all the support that is needed for AI. My brother, for instance, Jose, made, I think, a strong case for the energy side of that trade. Because between EVs, and AI the demand for electricity is just going off the charts, and it’s somewhere between 11x-17x more power hungry than a normal search that an Interactive Broker customer might do when they just type in and do a Google search. 

If instead they ask ChatGPT or Claude or any of the AIs that are out there to go find them an answer, it is going through an awful lot more rigor, if you will, and that rigor takes a lot more energy. That energy is in massive demand, particularly in the summertime, on the grids. So, I think about things like nuclear power. 

So Camco, what do they do? That’s a uranium play. And I think that stock has just zoomed to the upside almost as much as Nvidia. It has tripled and quadrupled over the last couple of years because demand for nuclear energy is going to be sky high. Natural gas is under loved. That’s instant on power, folks, for power plants that get a burst of demand. 

Many of them fulfill that burst, if they are able to, with natural gas. Because it can start boiling water and turning turbines immediately. Whereas coal is a slower process. Nuclear is instant as well, but we do not have enough nuke yet. So, I think if you wanted to break down AI and say we should be buying coal stocks and natural gas, I would say you are right. 

Jose Torres 

Interestingly, Jon, it serves as a hedge to the rest of the market. Oil prices going up drives the long end of the yield curve higher. That’s bad for growth stocks, but it’s great for energy names. And we have so much energy supplies here in this country, both crude oil and natural gas. 

I’m wondering how that’s going to shape up this Thursday during the debate. VIX Futures curve to, your earlier point, has been pricing in so a little bit of a climb in that VIX out in November. What do you think would be the market’s response to President Biden getting reelected in and starting a new term in 2025, or President Trump, getting reelected after losing the 2020 election.  

Final point some folks think that market forces have generally tried to help President Biden, and that’s why markets have been so robust. That’s some anecdotal evidence suggests that wondering if maybe if Trump wins 2025, maybe isn’t that great of a year for markets. What do you think? 

Jon Najarian 

I think if President Trump wins, we would see, in my mind obviously anyway, a lot more on the energy front that I just described. I would say everything from Transocean or Rigg to the pipeline companies like Kinder Morgan, KMI, and so forth, I would think that we’d see a flood of capital flow immediately if it looks like he was winning If it looks like he might win, I think those energy plays would be first and foremost. 

Because come hell or high water, we’re going to need more energy. One of the two candidates has not been very supportive of growing our energy, and that is the sitting president. He shut down the Keystone Pipeline build. He has made it much more difficult to get fossil fuels. And like I say I’m not a climate denier and I’m not a climate believer. I’m just saying the demand for power is going to be intense and that’s for some very good reasons like EVs, which if we can power the world with EVs and have less noise and less diesel and gasoline fumes great. I’m all for it. But I know the world isn’t ready for us to have more than a small percentage of vehicles that run on electricity. 

Because of the demand for the grid the power that supplies those. Whether it’s, again, dirty fuel, if you will, like coal, or a relatively clean fuel like Nat gas and nuclear we’re going to need a lot more power. I would say the power industry would be one of the areas that I would go for if President Trump were winning. 

The other energies in fossil fuels, I would go for, and I think if President Biden holds on and wins. Those would be areas that I would look too short. The ones that I just said I would buy under President Trump, because I really do believe, Jose, it’s a binary decision. If one wins, it is good for this sector. 

If the other wins, it’s going to be bad for that sector. Simple as that. I actually live in Puerto Rico, so I can’t vote for US President. That’s one of the things that happens when you are in my position and your residence is Puerto Rico. Unless you’re a US person that moves to Puerto Rico and does not become a resident you cannot vote for Congress, you cannot vote for President. We can only vote for what goes on the island.  

I’m not trying to push a particular viewpoint in order to get people to buy into one thing or the other or buy into one candidate or the other. I think a lot like you, Jose, just trying to read the tea leaves and see which sectors would benefit and which sectors would not.  

Without enough energy, the AI sector would suffer. There’s nothing to really stop that ball once it’s rolling down the track, but it would certainly move slower if you don’t have enough electricity. I think that would be the case, that you’d have, California, fifth largest economy in the world, has had rolling blackouts for years because they simply cannot provide enough power, and the EVs and now AI are putting additional strain on that same grid, so what happens if you cut back on fossil fuel production. If you aren’t as friendly to nuke. I think you’re going to have to see a rollback in how much access AI gets to the grid. So, I think these are sorts of things that I think about when I’m casting my, not ballot, but my investments into 2024, second half, and 2025.  

Jose Torres 

Great. Thanks, Jon. Final question, broad here. Some of the old school value investors, like myself, we look at China as having really inexpensive valuation conditions when you look at some of their tech stocks, but the political situation over there with the Communist Party and the last, six to eight years have been quite tenuous against the backdrop of them trying to create their own artificial intelligence powerhouse and also trying to create a big electric vehicle industry. 

From an investment perspective, what do you think about China? But then also from a geopolitical perspective how much of a threat is China? 

Jon Najarian 

I’m not a military guy. I certainly support our military, and for those of you who are part of it, thank you for your service. But how much of a threat is China? China wants to sell.  

When I was over in Russia, I think it was 2018, I was last over in Moscow and I was lecturing over there doing what Jose and I do, folks. 

And I was talking about derivatives, investing, even cryptocurrencies, and so forth. When I was doing that, I met a bunch of young Russians out at a shopping mall, looked identical to any of our high-end malls any of them, except it had a lot more high-end goods. I saw a lot more Gucci and Cartier and, Louis Vuitton and all that, like you do when you’re in China as well. I asked these young people, probably in their mid 20s, late 20s, I said, what does Russia say about us to you guys? And they said, they say you’re trying to kill us all the time. And I said, do you believe them? And they say, no, we don’t believe that. If you kill us, who’s going to buy your stuff? So, I worry about China. I worry about China taking Taiwan and us getting into a conflict over that.  

But bottom line, China needs to have people employed. They need to sell beyond their borders. Which means it’s a concern out there. It’s not top of mind as far as me worried right now, Jose, because I think it’s more important for China to keep people employed and to sell again outside their borders. 

That became a big problem for Russia, obviously. With the war in Ukraine, they weren’t able to sell as much as they were in the past. But they found ways around it. They’re selling crude oil to China and India. They’re refining it and sending it into Europe. It’s still Russian oil. They’re doing the same with Nat gas. 

The pipeline was taken down. Nord Stream 1 and part of Nord Stream 2 were taken out, but Russia just basically focused in on, okay, what do you use natural gas for other than energy? Fertilizer. So, they’ve been making a fortune selling fertilizer to the West, using all their natural gas for that, or at least a good portion of it. 

I think overall, all these big boogeymen aren’t as big a boogeyman if you really break down that they need to sell to us. We are one of the largest consumers on earth, as well as Europe and Asia. So with that being the case, I’m worried about China. I agree with you. I think they’re cheap. I think that BYD Automotive, you’ve seen some of the vehicles they’re making. 

Fantastic stuff. Stuff that we haven’t even put on the drawing boards yet, and China’s doing it. I think, overall, China wants to be a player in the world market. That means they need to sell. So, I’m not as concerned. I would do what you’re doing. I would selectively look at some of those valuations that seem way too cheap and put some chips on the table. 

Jose Torres 

I know that’s the last question, but since you put it into so much context, Alibaba, if I may, $74 today used to be worth $320, right? It’s seen as like this big behemoth in China, has a lot of different diversified revenue streams, what do you think about it? 

Jon Najarian 

I agree with you. I think it’s too cheap. Whether China has a billion or a billion three people in total, because I don’t know for sure what the number is right now, but it’s certainly a big number and it’s at least three times, if not almost four times our population and they don’t just deal in China. So, is it too cheap? Is the Amazon of China too cheap? Yes. I agree with you. Too cheap. And I’m willing to trade it, especially through options. It is one of those stocks that I don’t think if you’re really having a view of the world two years, four years from now, if you’re leaving China off your investing map, I think it’s a mistake. 

I don’t like having too much in there. Because of the idea that something volatile could happen with Taiwan or whatever that causes the world to, do to them what we’ve done to Russia as far as, limiting their access to our markets, but I think overall that one’s too cheap, Jose. 

Jose Torres 

Ladies and gentlemen, you heard it here. That is Jon Najarian. Thank you so much for being here. 

Jon Najarian 

Thank you, Jose. It’s a pleasure. Folks, have a great one and make sure you share Jose’s great work here with all your friends. 

Jose Torres 

All right, everyone. We’ll look forward to sharing our next episode. Please subscribe to your favorite channel on Apple, Spotify, YouTube, et cetera. Bye everyone.