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!

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Trades with yields up to 1,855%

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5 thoughts on “Trades with yields up to 1,855%

  • October 2, 2019 at 7:19 pm
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    Question: What happens if you buy and sell a calendar spread (one with puts, one with calls) betting in opposite directions and collecting a net credit on the trade? E.g. for TM, the mark price for a Nov/Dec call calendar spread is 10-20 cents higher than the put calendar spread at the same strike. If their risks offset, why would the call spread be more expensive? Is this an artifact of looking at prices on a high volatility day?

    Reply
    • October 3, 2019 at 1:24 am
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      I’m not sure I understand? You mean offsetting synthetic long and synthetic short positions separated by expiries?

      If the underlying is EXACTLY at the strike, the put/call will theoretically be identical. If not, an opportunity exists to do a “put/call parity trade” and arbitrage the difference for a risk free profit. In reality, academics and institutions agree there is a persistent premium for puts over calls (known as “negative skew”). This skew is typically “small” and sensitive to the prevailing interest rate.

      For an underlying that is not exactly at the strike, either the put or call will be in the money and the pricing will reflect that. Theoretically, the Time Value portion of the puts/call will be identical but in reality the negative skew persists.

      Reply
      • October 3, 2019 at 6:22 pm
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        For TM Nov-Dec calendar spreads at the $130 strike, I see the following “mark” quotes which I confirmed to be the midpoint between bid and ask:

        Calendar call: 1.13
        Calendar put: 0.90

        A positive “spread” between call and put calendar spreads exists all the way up and down the range of strike prices, and across dates.

        I wondered if an upcoming dividend was distorting call prices. However I saw the same general pattern with a non-dividend paying stock (CRM) and the S&P500 index.

        Reply
        • October 3, 2019 at 8:31 pm
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          Are you saying for the calls you would BUY the November expiry and SELL the December expiry? That would be a November synthetic long and a December synthetic short. Your Nov positions would have a P&L that tracks the underlying with the spread benefiting from an increase and the December benefiting from a decrease. I’d have to do a study to see what happens in every available scenario to make sense out of that. I’ve never heard of that as a trading strategy.

          Reply
          • October 4, 2019 at 4:20 pm
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            I’ve never heard of spreads of calendar spreads either. A short calendar call plus a long calendar put is not the same thing as a synthetic short plus a synthetic long because of the difference in dates. If done with vertical spreads, this would be a “box” arbitrage strategy. It’s more like a simultaneous bet on volatility and against volatility at the same time, to arbitrage an unexplained tilt in market expectations. But is it risk-free or at least low-risk? IDK.

            Perhaps this is the stock equivalent of doing calendar spreads on the VIX. TastyTrade has a video on why that is not a good idea – though I’m not sure it is applicable.

            https://www.tastytrade.com/tt/shows/market-measures/episodes/vix-calendar-spreads-02-26-2015

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