I am closing the Altria (MO) BCS early and replacing it with a Discovery Inc. (DISCA) BPS.
music selection: “Kiss You All Over” — Exile
My Altria (MO) spread was fully in the money much earlier than expected. As a result, I could capture most of the upside now or risk the trade reverting to mean against me for the opportunity to earn less than another penny per day. I elected to close. I sold the bear call spread opened here for 1.90 a share.
That trade was in force for 14 days and earned 70.21% on capital at risk (I won’t post the annualized return because people would assume I was lying. I invite the curious to do the annualization math on their own. At any rate, I have 528 in profit on a mere 752 in capital put at risk.
Since I’m still mildly leveraged, I want to make a replacement trade that is both small and bearish. For that I’m going to bet against Discovery, Inc. (DISCA) in what I consider a safe and high probability way. DISCA produces content for cable television. It has a flagship channel with the Discovery channel but most of the rest of its content is expensive and niche. Cord cutting is the hitting the business hard and it has missed estimates in 7 of the last 8 quarters. It is a business in steep decline. Almost inexplicably, management decided to try to right the ship by doubling down on a dying business model. They took on a lot of debt to buy Scripps Networks, adding operating cost and several additional niche programming channels that are not available in most “skinny bundles.” This is hastening their decline.
I am buying a very conservative in the money bear put spread. All I really need is for shares not to put on an unlikely rally during the time in force to earn 31.58% on capital at risk over 68 days. That would be 170% annualized.
I bought DISCA190517P00032500 for 4.412 per share. I likewise sold DISCA190517P00030000 for 2.512 for a net debit on the spread of 1.90 per share. There is 2.50 between the strikes and that is the maximum theoretical sales price as the options approach expiry. Thus, I can earn 60 cents per share on 1.90 in capital at risk or 31.58% over 68 days with a high degree of certainty. I will close early if the spread price closes below 57 cents (a 70% hard stop loss) or I can collect 2.38 (95% of the maximum sales price). I may also close out early if the stock tanks and my remaining profit per day becomes trivial as with the MO trade closed above.
Ravenous lizards playing the home game are cautioned against paying more than 1.95 for this spread and against putting more than 1% of your portfolio in this trade. Remember, maximum return is at any price below 30 at expiry (28.40 as of this writing). So this dog would have to rise at least 5.63% to begin cutting into profits. Sideways or downward movement yields the maximum return. But in the unlikely case the stock rises 14.44% or more, the expected loss is 100% of capital at risk. Don’t be a sucker.
Devour your prey raptors!