My weekly options trades.
music selection: “No Son Of Mine” — Genesis
weigh-in: 203.8 (1.2)
I continue to trade the markets with a market neutral approach. I have three trades today, a Bull Call Spread, a Bear Put Spread, and a Calendar Spread. If the market behaves as expected the returns will be 85%, 217%, and 1,855% annualized (respectively.)
First is a BCS on Ingersol Rand (IR). IR is a large cap manufacturer of HVAC equipment. It leads its space and has a fortress balance sheet. Growth has been steady and the company has a huge tailwind in the form of rising domestic housing starts. The housing market has been deeply undersupplied since the 2008 crisis and that is showing signs of turning around. I have purchased a spread that is almost 7% in the money so I have some wiggle room in case the underlying price starts to move against me. To that end, I bought IR191220C00110000 for an average of 15.25 a share. I simultaneously sold, using a combo order, IR191220C00115000 for an average price of 11.05 a share. The trade will be in force for about 82 days and has a net debit of 4.20 per share. If the calls finish in the money, I collect $5 per share for a gain of 19% or 85% annualized.
Next is a BPS on Capital One Financial (COF). COF is a bank that is over exposed to subprime lending. They have heavy exposure to subprime credit cards they issue and also have begun extending a large amount of sub prime auto debt. They have been reporting in their quarterly reports that delinquencies are rising. I can’t see this ending well for them. I’m not swinging for the fences though. I’m buying a spread that is 4.29% in the money so I can still profit if shares start to rise. I sold COF191220P00095000 for an average price of 6.5588 a share and simultaneously bought COF191220P00097500 for an average price of 8.2425 per share. The trade will be in force for 82 days and is expected to yield 49% on the net debit of 1.6838 or 217% annualized.
Finally, I have a calendar spread in Toyota Motors (TM). TM is a global automaker with a massive market cap. It moves slowly and is a safer bet than the domestic auto makers as it has not been juicing sales by aggressively extending credit to subprime borrowers. I expect the shares to go approximately nowhere for 47 days. Thus, I sold TM191115P00135000 for 4.644 per share while simultaneously buying TM191220P00135000 for 3.794 per share. The net debit is 85 cents and the CBOE options calculator tool expects that ceteris paribus the long put will be worth about 2.88 at the expiry of the short put. That is a 239% gain or 1,855 annualized. Calendar spreads are the best performing strategy from my back testing on net debit spreads. They also have the lowest win percentage and I am trying to be diligent about picking on unsexy megacaps that are likely to move slowly while I wait on the short contract to lose time value.
Devour your prey raptors!