I don’t have a trade today so I’m going to talk about my concept.
music selection: “I’ll Play the Blues for You (Part 1)” — Albert King
The raptor way is to be forever ravenous. But it is also to act from a position of superiority and safety. The fattest yields come from the riskiest of underlying stocks. And we want nothing to do with that. Earning 50% annualized does you no good if you get assigned and then lose everything because the underlying went to zero (90% annualized returns were regularly available on GTAT before the bankruptcy). What a raptor wants is to find something safe, boring even, and collect at least 12% annualized for the trouble.
There are several places to get such safe returns. My favorite is within the Dividend Aristocrat sphere. Getting assigned is not a bad thing here. If you end up holding for decades because the price never recovers, you will still earn a reasonable return from distributions with an out of the money covered call kicker. I was recently assigned Johnson and Johnson and I’m pleased as punch with the purchase.
The second favorite hunting ground is the Big Cheap Tech area. There are lots of high margin, cash rich business in the tech sphere that operate quite a lot like digital utilities. They supply indispensable global infrastructure and collect loads of free cash flow in the process. Their presence in an industry that is (wrongly) perceived to be volatile leads to plump options premiums. And there should be no fear of getting assigned to Apple, Microsoft, Qualcomm, Cisco, or the others.
The third is in property and causality insurance. The safety factor here is very high if you are choosy. You don’t want life insurers. They all use the same actuarial tables and thus have no competitive moat. That is a commodity business. You want P&C and you want the ones that have a ten year or better history of profitable underwriting.
A raptor will do well by sticking to these top three hunting grounds and standing firm until 12% or better annualized returns are on offer.
Devour your prey raptors!