Theme From An Imaginary AI Trade

Why we missed what would have been a large gain this week.

Theme From An Imaginary Western

Jack Bruce wrote a song in the late 1960s called “Theme For An Imaginary Western”, but lots of people remember it as “Theme From An Imaginary Western”. I vaguely remembered an origin story for it, that he was commissioned to write the song for a Western movie that never got made, but apparently that story was apocryphal: I couldn’t find any evidence of it after a quick internet search. Failing that, I asked the AI ChatGPT 4 Plus, which has a beta feature that lets it browse the web. Per ChatGPT, the song is a metaphor about the break-up of the group Cream, and the experience of touring in a band in general:

"Theme for an Imaginary Western" is a song by Jack Bruce and Pete Brown. It was first released on Bruce's second solo album, "Songs for a Tailor" in 1969, and has since been covered by several artists, including Mountain, which is how many fans came to know the song.

Despite its title, the song was not originally commissioned for a western film, real or imaginary. In fact, the "imaginary western" in the title refers metaphorically to the experience of being in a band on tour. The song was written by Pete Brown, who often collaborated with Bruce, and the lyrics are about the break-up of the band Cream, in which Bruce was the bassist and vocalist.

The "town" in the song is a metaphor for a concert venue, and the "children" are the fans. The "old men" who have "left the town" are the band members who have moved on. The "imaginary western" is the journey from town to town, show to show, like the nomadic lifestyle of characters in a western movie.

So, despite its title, "Theme for an Imaginary Western" isn't tied to a particular film or a film that was never made. Instead, it's a poetic and metaphorical reflection on the experience of being in a band and the transient lifestyle that comes with it.

Theme From An Imaginary AI Trade

ChatGPT offers a good segue into the topic of this post, which was a trade I set up on the AI software company C3.ai, Inc. (AI 0.00%↑) earlier this week.

AI was a stock I’d had on my radar for a while as one where the share price had outpaced its fundamentals. Then it spiked more than 30% on Tuesday. So on Wednesday, I tried to bet against it ahead of its earnings release after the close, figuring it was likely to pullback afterwards. I placed a limit order for this put spread and shared it with subscribers on Wednesday:

C3.ai, Inc. (AI 12.35%↑) is up more than 250% year-to-date and more than 100% in the last month. It releases earnings after the close today. I placed a limit order to open a spread on it expiring on June 30th buying the $35 strike puts and selling the $33 strike puts for a net debit of $0.95. The max gain on 3 contracts is $315, the max loss is $285, and the break even is with AI at $34.05. That order hasn’t filled yet, but I’m posting this now so you have to time to place it as well if you want to. The current midpoint on the spread for this one is $1.05, but I’m not going above $0.95 on this one.

Why A Spread

With that spread, the max gain would have been with AI trading below $33. To buy a put expiring on the same date with the same cost would have required going down to a $28 strike, so the stock would have had to drop further for the trade to be profitable.

Why That Limit Price

AI was trading at about $40 per share when I placed that limit order, meaning it would have to drop about 15% to hit the break even price of $34.05. Given the price movement required, I wanted to have a shot at a 100% return if things went well. That meant getting into the trade at a net debit of less than half of the spread. The spread was $2, so I entered a limit price of $0.95 and the trade didn’t fill. Had it filled at $0.95, we would have been able to exit with a profit of close to 100% Thursday morning when AI traded under $31 per share.

What Now

We’ll keep an eye out for similar opportunities in this space, where hype leads to parabolic moves and we can profit from the pullbacks. Given AI’s history, one of those opportunities will likely be in this same stock.