The AI Hype Cycle

Heather Cullen

Heather Cullen

Author
In The Money

Heather Cullen Blog Bulls are back

Where is AI on the Hype Cycle?

Many of you will know about the Hype Cycle, introduced by Gartner in 1995. It is a graphical representation of the maturity and adoption of technology. When I used to run IT departments it was a thing, and all new technologies were placed on it. You didn’t want to be sucked into the ‘peak of inflated expectations’ but you wanted to be ready to adopt when it approached the ‘plateau of productivity.’

Heather Cullen Blog In The Money AI Hype Cycle

Things start with a technology trigger, which captures the media’s attention. They breathlessly report how it’s going to change the world and you can barely open a news website without it being on the front page. Remember driverless cars?  Naturally, the hype is overdone and reality sets in. Interest wanes, so does enthusiasm. It’s yesterday’s news. A new shiny technology takes its place.

The Slope of Enlightenment

With the hype over, the technology can either become mainstream or disappear into the ether. As it is more understood, more realistic uses appear and early adopters start using it. Eventually becomes mainstream. Not always, of course. Some don’t make it. Remember Segways? 

The Plateau of Productivity

In 1995, it was predicted that the Internet would never be useful for shopping or banking (‘Silicon Snake Oil’). That in 1996 the internet would collapse catastrophically, and (this by a Nobel prize-winning economist) that the internet’s impact on the economy would be no greater than the fax machine. Yet now, it pervades everything and used in practically all industries.

 

If we look back 25 years, the big technology stocks of the day were riding the PC boom (MSFT, INTEL). Now, only MSFT is still riding high, all the others in the ‘magnificent 7’  have been riding the internet wave, and are now moving on to the AI wave.

Artificial Intelligence

Thankfully, the silly stories about AI plotting to take over the world have died down, and people and companies are seeing all sorts of applications for it.

Why am I so interested in it? Because I think it is going to have as massive an effect as the internet had, and will affect the whole market. Personally, when I sit down at my desk AI is the first thing I open. How about you?

Why did QQQ Go Up?

We had the situation last week where the Nasdaq went down 0.03% but QQQ went up 0.24%. Why? Because the Nasdaq Composite index (COMPQ / IXIC) is made up of ALL the 3,000 stocks on the Nasdaq stock exchange, and the Nasdaq 100 is the top 199 stocks (NDX). I have graphed them on the chart below (using the new charts on this website) and you can see that they shadow each other but are not exactly the same.

The Rule by Larry Hite

I am currently reading The Rule by Larry Hite, and finding it interesting. I can wholeheartedly endorse his first 3 rules:

 – Cut your losses let your winners run

 – Get in your game and keep trying. 

 – Play the hand you are dealt.

If the book continues as good., I’ll do a section next week on how it applies to the ITM strategy. If you want to read along with me the link is on the image.  Amazon has a ‘look inside feature’ so that you can read the first few chapters before you decide to buy it.

To the markets . . .

It wasn’t a spectacular week by any stretch of the imagination, but it was a very welcome respite. I think we can safely say that April was a bear trap, hopefully the last one for a while. Famous last words!

Heather Cullen Blog Bear trap

SPY Chart

From the close last Friday to this Friday’s close SPY gained 1.9%. Not exactly stellar, but going up nicely. The small candles show that the volatility is dying down, thank goodness. SPY has bounced quite convincingly off support at 500. It tested it over 2 weeks, and it held so that is a good sign. We are now getting very close to the previous all time high in late March.

I can’t say that the intervening time has been completely enjoyable. I’m sure you weren’t very keen on it either, but we stuck to the rules and it has paid off.

Heather Cullen Blog In The Money AI Hype Cycle

You can see it more clearly on the weekly chart, and it is heading back to the uptrend established last October.

SPYG Chart

SPYG is showing the same pattern as SPY. It is only a few cents off the high made in late March, and has also bounced quite convincingly establishing support around $69.

Heather Cullen Blog In The Money AI Hype Cycle

On the weekly chart you can see that it is hard up against resistance. Hopefully this time it makes it through!

Heather Cullen Blog In The Money AI Hype Cycle

QQQ Chart

QQQ has also bounced off resistance, and is closing in on the all time high made in March.

On the weekly chart you can see it is heading towards blue-sky territory. I would feel happier if it had properly tested support at $410, but the market does what the market does, and doesn’t heed my advice!

Heather Cullen Blog In The Money AI Hype Cycle

VIX Chart

The VIX has died down and is back at record lows. As you can see from the chart it seems to sleep for a few months then spring awake before going back to sleep.

Heather Cullen Blog In The Money AI Hype Cycle

I asked AI what kind of animal the VIX would be, and it said a cat, always unpredictable and ready to pounce so I got it to create an image.

Here’s the VIX cat:

Heather Cullen Blog In The Money AI Hype Cycle

ITMeter

Heather Cullen Blog ITMeter

The week ahead . .

Powell is speaking on Tuesday – nothing personal, but I wish he would shut up! The market always gets skittish when he gives a speech. Friday is options expiry for May so there will be a bit of volatility then.

Nvidia reports on the 22 May, so expect some volatility around then. Maybe we should do a straddle or a strangle? Not seriously suggesting it but would it pay off? Let’s check.

NVDA Straddle & Strangle

To get a May 24 expiry ATM 900 straddle (buying a call and a put at the same strike and expiry) would cost $9,785 and NVDA would have to trade above $998 or below $802 to break even. In other words it needs to increase or decrease by 11% before we even get our money back. To get a 100% profit it has to trade below $706 or above $1,098.

Hmmm. Doesn’t sound enticing. Let’s try a strangle, they are cheaper.

We can get a May 24 expiry 950 / 850 strangle for $5,720. The breakeven is $787 on the downside, and $1005 on the upside. To get 100% profit NVDA needs to trade over $1,065 or below $735.

Nope, not for me.

Fancy options strategies sound good, and after the fact you can always point to examples where they worked. But the successes are few and far between. I’ll stick to safer strategies!

Futures

At this point, 11 hours to market open, the futures are neutral – as expected really.

Heather Cullen Blog In The Money AI Hype Cycle

Let’s hope for a nice, uneventful week with a modest increase. That will soothe us all, I’m sure.

The days are getting very short here in Australia, so I’m preparing to leave for my summer in Europe. I’ll keep the blog going while I am away, but I’ll be working on a laptop without any fancy software & big screens, and reliant on hotel wifi (which can be flaky!) so I apologise in advance for any drop in quality.

Fingers crossed for a good week.

Heather

Questions & Answers

27 thoughts on “The AI Hype Cycle”

  1. Heather,
    FYI: Note question asked about SPY calls and answer given by Gemini at 3:45 pm pm 5-18-24: by John Millard

     Under what conditions will I make a profit if I BTO a call option on SPY , an expiry of 12-19-24, with a strike of $265, and an ask of $280.27, with a market price of $529.45. Please provide the percentage increase in the market price to realize a profit. Thank you.

    Here’s the breakdown of the conditions needed to make a profit and the corresponding percentage increase for your long call option on SPY:

    Break-Even Price and Percentage Increase:

    Strike Price: $265
    Ask Price (Premium): $280.27
    Break-Even Price: $265 + $280.27 = $545.27
    Percentage Increase Required to Break Even:

    To calculate the percentage increase needed for SPY to reach the break-even price, we can use the following formula:
    Percentage Increase = ((Break-Even Price – Current Market Price) / Current Market Price) * 100%
    Current Market Price: $529.45
    Percentage Increase Calculation:

    Percentage Increase = ((545.27 – 529.45) / 529.45) * 100%
    Percentage Increase = 2.99% (approximately)
    Conditions for Profit:

    SPY Price Increase Above 2.99%: You’ll only make a profit if the market price of SPY increases by more than 2.99% from its current price ($529.45) by the expiration date (December 19th, 2024).

    Profit Potential: The higher the percentage increase in SPY’s price above 2.99%, the larger your profit becomes.

    Example: If SPY reaches $570 by expiration (around a 7.72% increase), you would have a profit if you exercise the option. You could buy at $265 and immediately sell at $570, for a profit of $570 – $265 = $305 per share.
    Remember:

    Time Decay (Theta): Don’t forget that time decay will erode the value of the option as it gets closer to expiration (December 19th, 2024) even if SPY’s price increases. This can eat into your potential profits.
    Risk of Expiration Worthless: There’s always the risk that SPY’s price won’t reach $545.27 (or above) by expiration. If that happens, the option will expire worthless, and you’ll lose the entire premium paid ($280.27).
    In Summary:

    To make a profit on this long call option, SPY’s price needs to increase by at least 2.99% by December 19th, 2024. However, time decay and the possibility of the option expiring worthless can significantly impact your profit potential.

  2. What’s Up? Heather, based on Schwab info, I asked Gemini the following question and the answer is fount below: Is the answer correct? Thank you very much! To Gemini… Thank you for the great informatlion in your previous answer. I repeat the question again because I want share your findings with an expert options trader. The question is, “at what price and percent per share would I break even if on the day of the trade, the Market Price of “xyz” ETF was $529. The strike price of the call was $265. The Ask price for the long term call option which was 20 months away was $$279. Thanks, again. You would break even on this long-term call option for the XYZ ETF at the following price and percentage: Break-Even Price per Share: $544 Break-Even Percentage: 2.82% Here’s the breakdown: Strike Price: $265 (price you can buy the ETF at if you exercise the option) Premium Paid: $279 (cost to purchase the call option) Break-even calculation: Break-Even Price = Strike Price + Premium Paid Break-Even Price = $265 + $279 = $544 Break-even percentage calculation: Break-Even Percentage = (Break-Even Price – Purchase Price (Market Price)) / Purchase Price * 100% Break-Even Percentage = ($544 – $529) / $529 * 100% = 2.82% Explanation: For your call option to be profitable by expiration (in 20 months), the market price of the XYZ ETF needs to be above $544. This translates to a price increase of only 2.82% from the current market price of $529. Sharing this information with your options expert: This information provides a starting point for your options expert to analyze the trade further. They can consider factors like: Time decay (Theta): How the value of the option will erode over time as it gets closer to expiration. Volatility (Vega): How the option’s price is affected by fluctuations in the underlying ETF’s price. Interest rates (Rho): How changes in interest rates can impact the option’s price. Remember: Options trading involves risks. You could lose the entire premium paid if the option expires worthless. This analysis is for informational purposes only and should not be considered financial advice. Consult with a financial professional before making any investment decisions. pen_spark tune share more_vert

    1. Hey! I’ve yet to play with Gemini, must give it a go. I am using Chat GPT 4o, which is good but not particularly up to date. (and also very politically correct – I sometimes have to say ‘just give me the answer stop lecturing me about what I should think!’ It apologises quite nicely.)
      I’ll have to break dow the above using a spreadsheet, and I haven’t got time today. I’ll get onto it tomorrow!
      h

  3. Subject: Profitable Entry Points Heather. At what stock price or situation do you suggest entering a DITM trade on SPY and SPYG? I’m anxious to begin a trade but the ETF’s mentioned above seem expensive. Thanks, John 5-15-24

    1. Hi John,
      ‘expensive’ is a term I use when volatility is high, leading to the time value being high. So, for example if SPY was trading at $530 and I bought a $300 strike option for $235 then the time value would be 1% and I would think that ‘cheap’. If I bought the same option for $255 then I would think it ‘expensive’ as it has a time value of 4.7%.
      Today’s chains show a $265 (50%) strike Dec 2024 expiry with a bid / ask of 269.59 / 270.88 si buying at the midpoint would cost $270.24 which is a time value of 1%, so I would consider that ‘cheap’. If I look at the $320 (60%) strike the bid / ask is 216.81/217.94 so the mid point is $217.75. which is 1.4% time value, which I would also conside ‘cheap’.
      But I suspect we are talking about different things – are you referring to SPY and SPYG themselves being at new highs?
      If that is right please come back to me.
      Hope this helps
      h

    2. Hello Heather,
      Re: Profitable Entry Point Clarification
      I have both of your DITM books for Bull and Bear markets. Great information and anxious to start using your strategies. (Perhaps I need to study them more fully.)

      Anyway, my understanding of Bull DITM strategy is, to quote you, hopefully correctly, “We buy DITM options with little or no time value and then hold them until we either get an out signal, or are getting close to 30 days to expiry. “DITM Strategy Approach: It buys deep-in-the-money (DITM) SPY call options at least 6 months to expiry with a low time value.
      I earlier asked for your expertise in identifying a probable profitable entry market price point for buying a DITM SPY call option contract assuming that the lower the market price of SPY, the more likely I could make the trade profitably. Perhaps my assumption is untrue! Here is why I wonder… in re-reading a portion of your book, I note that you suggest entering a DITM call option trade after the occurence of a Golden Cross and REMAIN in the trade until the occurence of a Death Cross? Right? My earlier assumtion was that as the market price of SPY reaches lofty heights, the more likelihood of a significant and lengthy negative reversal. Hope that I’m not wearing you out.
      John 5-18-24
      PS So far, Gemini, formerly Bard, has been free to use. I like it. My impression is that sometime in the unknown future a reasonably priced ($10/month) subscription may occur. Try it now while it is gratis.

  4. Heather,

    Thank you for all you do. I’ve read several of your books and have been trading ITMS since January. I currently have a SPYG $40 Jun 21 C that I purchased in January. It is 37 DTE.

    My question is why do you suggest rolling at 30 DTE? I understand selling options before 30 DTE to avoid time decay but these call options were purchased with very little extrinsic value. I checked the prices of my Jun 21 call and the May 17 call of the same strike. They are within pennies of each other. So I’m just wondering what are the potential hazards of waiting until closer to expiry to sell?

    Jeff S.

    1. Hi Jeff, you are right, there’s no real advantage if there is practically no time value.
      I guess I stress it because many people will also have a side flutter on an OTM options, and there it is important not to lose time value. Just a good habit to get into – but with DITM options it is not strictly necessary.
      Well, I am just reviewing the day’s trading – rather a nice result, don’t you think? New highs in all 3 major indices!
      Glad we didn’t get cold feet a few weeks ago.
      h

  5. It’s interesting to have found this. Years ago I had a way of trading options and I wound up doing it with ITM for the same reason as you. The trading technique quit working and I quit doing it. And forgot the idea of the ITM option variation. Exciting! Bob

  6. Hi Heather, I hope this message finds you well. I’ve been exploring the “Bull Market In the Money” options strategy that you invented and have found it quite intriguing. One aspect that caught my attention is the “ideal” entry point when the 10 period SMA crosses up over the 200 period SMA, signaling a potential bullish trend. However, I’ve noticed that such occurrences are infrequent, with the last one being around November 2023. I was wondering if you could share your insights on whether it’s advisable to look for this condition on a smaller resolution timeframe, which we could refer to as a “micro timeframe.” For instance, would it be reasonable to consider an entry when the 10 period SMA crosses over the 200 period SMA on an hourly candle, provided that the larger timeframe (daily candle) also exhibits favorable conditions? Thank you for your time and expertise. I appreciate any guidance you can provide on optimizing the entry points for this strategy.

    1. Hi Pat
      yes, the golden cross was last November and is still in force. waiting for a death cross so that we can get a ‘new’ golden cross is not a good idea, as we might be waiting a long time! it is fine getting in at any time as long as they condition (golden cross) is still in force, however, the backtesting is based on being in the market from cross to cross.
      If you step back through the charts, to , say, June 2020 you will see that the golden cross was in force for 19 months, and increased from 300 to 450 dyring that time. Coming late to the party, say end 2020 would have seen your gains limited, from 360 to 450, which I think is still worth doing.
      Re different time frames: I have tested extenxively, and the 10/200 daily is the best performer – but I haven’t tried on a less than dail chart.
      Two problems spring to mind:
      1. getting histroical hourly data – I don’t know of any source.
      2. The validity of comparing different hours. For example, the first hour in any day is often the most volatile, and the trend often reverses about 30 minutes in (that’s my observation, not a known fact) – can we compare the first hour to any other hour? Is that valid?
      However, I understand what you are saying, and one person who uses minute charts is Tom Hougaard, and his book is Best Loer Wins, here’s a link to Amazon where you can buy it: https://amzn.to/3UJjXN1 . He also trades live every day – I followed him for a while – fascinating, but I lost money!
      Hope this helps
      h

    1. Hi Brian – I believe that if you call customer service they can arrange it (I can’t do anything from this end, I have the same customer service access as you!). Some readers have said that there is a checkbox where you can tick for automatic updates, but others have said they can’t find it.
      Probably best to contact custoemr service.
      h

  7. Hi Heather, Thank you for the great books you wrote ITM & ITMB. I just read ITM for the second time and I’m in the process of reading ITMB for the second time. I have $26,000 to invest starting on 5/18/24. As far as I can tell it doesn’t matter what time of the year you buy your options as long as its 1 year out for ITM and 6 months for ITMB, is this correct? The only problem I see is I am having a hard time finding an effective price within the 1% guidelines, any suggestions? I am a 65 year old retired pipe fitter, that work in construction my entire life. I am just starting to learn about investing on my own. Thanks again for any guidance you can give.

    1. Hi Rich (great name!)
      No, it doesn’t matter what time of year, and the original guidance of 1 year out for ITM has been brought in a bit (as options are now more expensive because of interest rates) – so as long as it is over 6 months all is OK. I have just answered another readers questions about the prices as of today – Kishore – maybe you want to have a look at the answer there?
      And ITMB – yes, it was 6 months, but we’re not in a bear market, so you don’t have to worry about that right now. Here they were:
      Re current option chains, for a December 2024 expiry there is”
      Strike $260 (.e. 50%) Bid / ask 265.96 / 267.28 Time value: 1.1%
      Strike $310 (i.e. 60%) Bid / ask 218.01 / 219.19, Time value 1.5%
      Hope this helps.
      h

      1. Hi Heather,
        Thank you for answering my questions. I was really nervous, but On 5/16/24 I did buy a January 17, $300 call options for $236.99. Not sure if this meets the guidelines exactly but it was the best I could find. I also read you book Timing the market and just downloaded your book Options Trading for Beginners. I love all of your books so far, thanks again for making this option trading system so simple.

        Sincerely,
        Rich Conklin

  8. Hi, Heather, I enjoyed reading your material on DITM’s. You have done a fabulous job!!! Do you have any materials on writing options or investing plan including this? Thank you, Greg

    1. Hi Greg
      I have written options in the past, and do dabble from time to time. I used to have a system where I wrote weekly options, and it was quite profitable, but doing it became a bit painful as I was in Australia and it required you to be up at night! So I let it slip.
      I have been meaning to revisit it, I may do thhis over the European summer as the time difference is better there.
      Will post the results if it is still a good trading strategy!
      h

  9. The Rule by Larry Hite is indeed a great read. I will be interested in your thoughts.

    Keep up your great content as well as you too are a great read.

  10. Hi Heather,

    I went through your updated version of ITM but I was not able to understand new rules or cheaper way to buy call option.
    I know you mentioned 60% / 1 % or 50 %/2% but was not able to find in book. Please let me know page number where you mentioned about this. apologies if i have missed it.
    Also, if i want to buy ITM call I noticed that Mar2025 expiry does not meet the rules while Jan 2025 requires premium around 23k . Please let me know how do I enter the trade

    Thanks
    Kishore

    1. HI Kishore
      its the other way around: 50% strike with 1% time value, or 60% strike with 2% time value, it is all in Chapter 10.
      Re current option chains, for a December 2024 expiry there is”
      Strike $260 (.e. 50%) Bid / ask 265.96 / 267.28 Time value: 1.1%
      Strike $310 (i.e. 60%) Bid / ask 218.01 / 219.19, Time value 1.5%
      Both of these meet the criteria. (Oko one is 1.1% instead of 1% but its is close. If you com in a monthe then it will be under 1%)
      Hope this helps
      h

      1. Thanks for the response. As per book we can start with 15K but above entry will require 25K . Please let me know if I am missing anything.

        1. HI Kishore – you are looking at an old copy of the book. I am afraid everything – including the S&P 500 has gone up since then first 2 editions were published. Thats why i introduced iTMS, the strategy for people with smaller accounts.
          I wrote about the latest edition in the blog way back in early April.
          If you have an eBook then you should be able to get the new edition free – you have to contact Amazon customer service to arrange.
          Hope this helps
          h

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