F and CTL have not performed as expected.

music selection:  “Brealfast At Tiffany’s” — Deep Blue Something

weigh-in: 197.0 (0.4)

I get a lot of mail from excited readers who see  really enticing options returns who want to learn how they too can earn an average of 35% a year annually.  I hate to be the one who disappoints them.  Sure, sometimes I hit a few out of the park.  But there are lots of options trades where I have to accept less than the long term average of the S&P.  Over the long term, I intend to at least match the index.  But beating it is only my goal when we are talking about on a risk adjusted basis.  I want to do well AND sleep well at night.

To that end, a healthy allocation to fixed income and debt like securities is essential (tune in every Friday for more on how to do that).  In the meantime, I work hard to reduce my risk in equity by writing puts and calls.  Today, I have two options written for less than stellar premiums on stocks that just are not exciting anyone at the moment.

First up is CenturyLink (CTL).  CTL is a fiber optics communication company.  They have a great future but have failed to sink their putts recently.  The market has punished them.  I hold shares with a cost basis of 23.50.  Current pricing is 19.23.  Clearly, I have an unrealized short term capital loss.  I’ve previously collected 90 cents from this one, somewhat easing the pain.  That is the risk reduction of options I was referring to earlier.  Simple buy and hold investors are doing even worse.

I am looking to earn a little income while waiting for the price to recover.  To that end, I sold CTL190118C00024000 for 6 cents a share.  The trade will be in force for 68 days and yields an expected 1.34% annualized.  In the unlikely event shares close over the strike at expiry and shares are called away, I will collect an extra 50 cents in short term capital gains.  That will boost the annualized return to 12.52%.

I also have a conventional short position open in Ford (F).  I see GM and F as soon to be victims of their own reckless lending policies.  They have issued a ton of subprime debt to move inventory to people who can’t really afford it.  Delinquencies are already rising and underwriting is tightening.  The companies will lose money on financing and lose even more on declining volumes.  I am short 500 shares at prices between 9.41 and 10.94.  The current price sits at 9.49.

I am selling, once again, a covered put against the position to earn income.  This income offsets the borrowing cost and the payments that must be made in lieu of dividend to the party I borrowed shares from.  The net payout is just barely above break even, but it keeps me in the trade while I wait for the credit cycle to turn over and the thesis to play out. I sold F181228P00009000 for 16 cents a share.  The trade will be in force for 47 days and yields an expected 13.81%.  There is room for an additional 49 cents in capital gains if shares are called away.  Total capital gain will vary by the lot as the entry prices are between 9.41 and 10.94.

These returns will probably not excite my readers.  I do hope at least a few see the underlying point which is that risk matters more than absolute returns.  By having a fixed income base that covers more than 100% of my annual budget, I am able to sit on the sidelines and wait a little longer.  Days like today where nothing exciting is being offered by the market and the best I can do is pedestrian maintenance trades do not bother me.  There will be fat pitches again soon enough.  Patience while stalking prey is the raptor way.

Devour your prey raptors!


Monday Trades – Making the best of bad positions

Never miss another opportunity to devour prey!

4 thoughts on “Monday Trades – Making the best of bad positions

  • November 13, 2018 at 6:22 pm

    Keep some cash handy and a contingency plan in mind for when the fat pitches come. I bought puts on the ^VIX at $1 when it hit 24 in mid-October, then sold those puts for $1.50 when VIX inevitably fell 20 days later (look at the history; how often does VIX stay above 24 for 6 months?). This is a rare option bet where reversion to the mean can be foreseen, but options are still priced based on the assumptions of a normal distribution.

    In late September, when ^VIX was something like 11 or 12, I tried to buy a bull spread (likewise, what are the odds of VIX staying that low for 6 mos?) but was too greedy and my limit order never executed before ^VIX doubled soon thereafter. Doh!

  • November 14, 2018 at 2:40 am

    If the theory is that bad credit will destroy the automakers, why not get long dated puts a bit out of the money? It seems that especially with F’s yield, the put option is the smart way to play this one.

    Take for example F200117P00008000. It’s going for abou $0.50 per contract, which is less than the dividend payout for the year ($0.60). If you sell short and then sell this option, it’ll hardly even cover your option payouts and limit your potential gain to about 15% for a year (before short borrowing cost). If you really believe the thesis, why not use options to give you a similar return and park the rest of the money in something safer?

    • November 14, 2018 at 3:03 am

      I also have long dated (long) puts in GM and F. I don’t cover them on the blog as I’m trying to promote a path to monetizing an asset base with options sales and fixed income.

  • November 14, 2018 at 5:53 pm

    Funny you mention CenturyLink (CTL) as I just sold a put at strike 18 this week.
    I like the premium ad when assigned I will like the dividend even more ..


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