Making a small bullish bet on housing.

music selection:  “Lucy In The Sky With Diamonds” — Elton John

I continue to find ways to earn income using options while deploying less capital at risk.  Net debit spreads seem to fit the need well.  Today, I bought a bull call spread on iShares U.S. Home Construction ETF (ITB).

I like what I see in housing numbers.  Millennials are finally starting to buy homes.  Population growth has outpaced new housing starts for close to a decade.  Interest rates and home affordability are still in a good place for the sector.  The ETF I’m playing is in a strong uptrend, up 23.8% year to date.

I like to target about 90 days for net debit spreads.  I chose the July expiry 102 days out for this trade.  I bought ITB190719C00036000 for 2.33 a share.  To complete the spread, I simultaneously sold ITB190719C00037000 for 1.71 a share.  I bought 15 spreads for 930 dollars total capital at risk.  (Commissions came out to 11 cents for the whole smear.  Seems the market maker was glad to oblige me even though I only offered a penny over the existing bid.)

The full spread cost 62 cents a share.  If I hold till expiry and the stock finishes about 37, I’ll collect one dollar per share.  That is a return of a little over 61%.  I actually have a good till canceled limit order open to close at 95 cents as a matter of avoiding early assignment.  That would be a 53% gain in or less than 102 days or 190% annualized.  Similarly, I’m tracking offline a stop loss at 25 cents.  That keeps my downside at roughly the level of my upside.  The purchased call is already in the money and I think there is a high probability of collecting 95 cents.  Profit would thus be 570 dollars on 930 capital at risk.

I’ll be looking for more opportunities to buy spreads like this.  In addition, I am scanning the horizon for opportunities to buy calendar spreads on large, mature, and slow moving equity.  That is a neutral strategy that I feel is more defensive than selling covered calls.  Altogether, I hope this shift allows me to earn sufficient income along with distributions while covering my budget and allow me to raise cash for the upcoming opportunity in high yield bonds.

Devour your prey raptors!

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Bull Call Spread ITB

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One thought on “Bull Call Spread ITB

  • April 11, 2019 at 3:53 pm
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    Looks like the last ex-div date was 3/20 so there would be another ex-div date and risk of early assignment on about 6/20 in the amount of about 6.3 cents per share. Implied volatility would need to be very low and the ETF price would have to rise for that short call to have less than 6.3 cents time value remaining with about 30d duration left on it.

    Today (at VIX =13), the 37 calls with 30d duration have 78 cents time value. The 33 calls have 4 cents time value. So I’d guess your getting assigned scenario looks like this: ITB jumps by about $4 (10.8%) and VIX is about 13 on the ex-div date. If such an uptrend is underway, I bet you could unload the long call before the trend reverses.

    So assignment is nothing to worry about. I’d be more nervous about making a bullish bet that a correction won’t happen and hit one of the most vulnerable sectors. Also, this is a bullish bet right after a yield curve inversion. We’re facing sort of a binary outcome; we’re going either up or down this summer! I recommend trying to pick up a bear put spread on the cheap to make your whole position a condor (i.e. if ITB rises dramatically and you can get the 35/36 spread for 20-25 cents, leaving you with a still respectable double-digit return.).

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