Staying market neutral.
music selection: “A Little Respect” — Erasure
weigh-in: 205.6 +1.8
The market is still on shaky ground with high valuations, a long running bull market, a flat yield curve, trade worries, and weak economic data. The long term trend points to more gains but I’m positioning myself in case the end is nigh. I have a neutral calendar spread in Walmart (WMT), a bearish spread in Royal Caribbean Cruises (RCL), an a bullish spread in Disney (DIS).
Disney is a media juggernaut with a bright future. The trend is stable but I think shares are due for a rally. I’m buying a bull call spread (in the money for some downside protection). To that end, I bought DIS191220C00115000 for 15.95 a share and simultaneously sold DIS191220C00120000 for 11.75. My net debit is 4.20 per spread and the trade will be in force for about 75 days. The trade has 7.46% downside protection due to being in the money. Unless shares move against me by more than that amount, the spread will be worth 5.00 at expiry with 80 cents of profit per spread. The most I can lose is 420 dollars per spread with 80 dollars in (likely) upside. That is about 19% over 75 days or 93% annualized.
Royal Caribbean is a cruise line company. They are in a very cyclical industry where the companies basically never fail to over build ships during good times and take on too much debt. Share price is very sensitive to declining economic conditions as people cut out luxury vacation when belt tightening. Empty or even partially empty ships lose money fast. The six month trend is down and I think there is some easy money to be made in a bear put spread. I sold RCL191220P00110000 for 10.776 per share and simultaneously bought RCL191220P00115000 for 14.676 per share. My net debit for the spread is 3.90 and the trade will be in force for about 75 days. The trade is in the money and carries 7.89% protection against a move in the wrong direction. Should shares finish in the money, the maximum profit of 1.10 per spread will be earned. That is 110 dollars of profit on 390 dollars at risk. The arithmetic is a 28% return over 75 days or 137% annualized.
Finally, I have a calendar spread in Walmart (WMT). The company needs no introduction. With its enormous size, asset base, and sales, it is a near certainty shares will be slow moving. The recent trend is for the shares to trade sideways making a great set up for a calendar. I sold WMT191122P00115000 for 2.62 a share and simultaneously bought WMT191220P00115000 for 3.37 per share. My net debit is 75 cents and the most I can lose on a spread is 75 dollars. The trade will be in force for about 47 days. At the expiry of the short put, assuming all things remain constant the long put will be worth about 1.18 per share. That is 43 cents of profit against 75 cents at risk. The return over 47 days is 57% or 445% annualized. An even better return can be realized if the shares finish exactly one penny in the money (my ideal scenario).
That is three trades nearly anyone can get into as the most capital that is necessary to put at risk is 420 dollars. The returns are probable and look pretty tasty. I hope this was instructive.
Devour your prey raptors!