Weyerhaeuser was assigned early on Friday.

music selection:  “One More Try” — George Michael

weigh-in:  208.4 (1.6)

First up is the Weyerhaeuser (WY) assignment.  I earn the remainder of my premium a week early because my counter-party made an error.  I’m selling covered calls to earn some income while I wait for the price to recover.  I’ll be exiting substantially all covered call positions over the next months if price action supports that and focusing on small net debit spreads, especially calendar spreads as discussed Friday.  I sold WY190726C00026500 for 15 cents a share.  The trade will be in force for 47 days and yields an expected 4.48% on an annualized basis.  I remain eligible for the underlying distribution of almost 6 percent.  This is a disappointing position I hope to exit from and not look back.  Just need a short term rally to exit gracefully.

I really like Electronic Arts (EA) right now.  They have a new Battle Royale style game that is an instant hit.  They propelled the game to a high place with an unconventional marketing approach of paying professional gamers to play the game and promote it on Twitch during launch.  Its first week numbers surpassed Fortnite on a much smaller advertising budget.  The game launches in the world’s biggest gaming market next, China and the prospects are huge.  EA has also recently inked a deal to be the publisher for three highly anticipated games from independent publishers.  I like Activision Blizzard’s long term prospects as well but they are struggling short term with the loss of an important creative partner and the revenue associated with the software house.

I bought an in the money Bull Call Spread on EA.  Using a limit order, I bought EA190719C00080000 for 15.875 a share while simultaneously selling EA190719C00085000 for 11.4475 a share.  The net debit is about 4.43 a spread.  Maximum profit is earned at any price above 85 at expiry in 40 days.  With the current price at 95.51, I have 11% downside protection before profits are threatened.  Maximum profit is 57 cents a spread or 12.87% which is 117% annualized.  I’ll close early if the position closes down more than 50% or if I can earn 97% of maximum profit before expiry.  I am hedged but don’t want the hassle of early assignment.

I noted Friday that I was going to start building out Calendar Spreads.  This is a strategy that lets you profit mightily from stability in a stock’s price.  Likewise, I will be targeting big fat and slow moving slugs of stocks with large market caps and low Betas so they are unlikely to make sudden moves during the holding period.   I am using Put spreads instead of Call spreads to focus my protection on downside moves resulting from political instability and/or unexpected moves by the Fed.  I have selected Zoetis, Inc. (ZTS) for my first public experiment with this strategy.  ZTS is a mega cap veterinary medicine company.  It has steadily increasing sales and profits and is resistant to recessionary pressures due to pricing power and the essential nature of its product to for profit animal husbandry.

Using a limit order I sold ZTS190726P00110000 for 2.5553 per share while simultaneously buying ZTS191018P00110000 for 5.6525 per share.  The net debit is about 3.10 per share.  The spread will be active about 47 days.  Because of the nature of time decay, the short call will decline in value much faster than the long call.  At the expiry of the short call, the spread should be worth more than its original cost.  Conservatively, the long call will be worth 3.50 or more per share around expiry.  That is a 12.9% return or a hair over 100% annualized. If the price makes a large move to either side, I should have an opportunity to close early.  I will also close early if the puts are in the money when the short call trades around 7 cents or less to avoid early assignment.

These two net debit spreads have much greater profit potential than the covered call approach I have traditionally used.  There is a slightly elevated risk of losing the entire investment if the spread closes at a price of zero.  I protect against this will smaller position sizes.  This is how I want to be positioned through the next bear market and I expect to do well while raising cash to deploy into distressed bonds at the depths of the next crisis.

Devour your prey raptors!

Monday Trades with Calendar Spread

Never miss another opportunity to devour prey!

2 thoughts on “Monday Trades with Calendar Spread

  • June 16, 2019 at 2:53 am
    Permalink

    So, calendar spreads are a bet on stocks staying range-bound, but you’re making that bet at a time when the yield curve is inverted and your stated goal is to prepare for a downturn? Not giving you a hard time — just doesn’t seem to me like the strategy matches the rationale. Are you trying for a balanced options portfolio by deploying a combo of bullish, bearish, and neutral plays, each with limited downside?

    Reply
    • June 16, 2019 at 6:01 pm
      Permalink

      I’m trying to be more neutral. Situations like this tend to erupt higher before crashing hard. Going short now is just not a good idea. So you mix neutral, bull, and bear. For neutral, you go with low Beta and large market cap under the theory that it won’t move 60% in a six week span. You probably see the breakdown developing and have time to trade around it. A high Beta name strikes like lightning though. They might offer more upside but at the cost of far greater risk.

      Reply

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