Staying market neutral.

music selection: “Ghost Of The Navigator” — Iron Maiden

weigh-in:  205.6 n/c

The market continues to be richly valued but lacking in direction.  The S&P is locked in a range near 3,000 and could stay there some time before a breakout either direction.  Trade worries continue to loom on the horizon.  War with Iran remains a possibility.  Now is not the time to be elatedly bullish.

I bought a bull call spread on DR Horton (DHI).  That is a homebuilder that is rallying over the last 18 months as new construction activity works through a backlog of under building new homes over the last decade.  Low interest rates should keep them growing.  I bought DHI200117C00046000 for 7.567 per share.  At the same time, I sold DHI200117C00047000 for 6.747 a share.  My net debit is 82 cents a share and the trade will be in force for about 96 days.  I have downside protection of 10.19% to defend against a move against me.  So long as that does not happen, I will earn 18 cents per share on 82 put at risk.  That is a return of 22% or 83% annualized.

I also bought a bear put spread on Santandar (SC).  This is a highly leveraged bank that is over exposed to subprime credit and delinquent student loans.  I think it is over valued.  I sold SC200117P00027000 for 2.61 a share and simultaneously bought SC200117P00028000 for 3.41 a share.  My net debit is 80 cents a share and the trade will be in force for 96 days.  With 7.70% downside protection, this trade is highly likely to finish in the money and earn 20 cents per share.  Against the 80 cents of capital at risk that is a 25% return or 95% annualized.

Finally, I bought a calendar spread in Boston Scientific (BSX).  This is a large cap company that is largely mature and has a slow moving share price.  It is a good candidate for a spread that bets on time decay in the absence of movements in the underlying.  I sold BSX191129P00039000 for 2.02 per share.  I also bought BSX200117P00039000 for 2.57 per share.  The net debit (and my maximum loss on the trade) is 55 cents per share.  Should all things remain the same between now and expiry of the short put in 47 days, the long put will be worth about 2.02 per share.  The 1.47 in profit is good for a 267% or 2,076% annualized.  Calendar spreads are my lowest probability trade but also my highest earners.  On net, buying calendar spreads on slow moving mega caps is my best strategy.  But you must be diversified and keep you position sizes reasonable.

Devour your prey raptors!

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Monday trades with yields up to 2,076%

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5 thoughts on “Monday trades with yields up to 2,076%

  • October 15, 2019 at 11:01 am
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    It’s been awhile since I’ve visited your blog. Are you still buying puts on UVXY or other volatility products?

    Reply
    • October 15, 2019 at 1:29 pm
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      I have a conventional short on VXX that I’m slowly closing. The market is so frothy I think it is due for a black swan event that makes UVXY long puts counter indicated.

      Reply
  • October 15, 2019 at 2:42 pm
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    I’ve been a big fan of the homebuilding sector for the past five years. I’ve been in LGI Homes (LGIH) since 2015 and it has been a big winner. LGIH originally operated mostly in Texas, but has since expanded nationwide.

    While the homes that LGIH sells are probably not the ones that I would buy (inexpensively built homes in the exoburbs), they are very much in demand with my millennial cohort. They’re smart about their marketing; I used to get advertisements from them all the time when I lived in an apartment in North DFW, “your mortgage would be the same as your rent, come see us…” They’re now starting to sell homes that already have furniture and some finishings that aren’t normally part of construction. It’s clever because people really want stuff like that to be rolled into their home loan and they’re willing to pay a little bit more for it to have it at 4% instead of 8%. LGIH just seems to be smarter than the other companies out there and it explains why their growth continues to outpace the market.

    Still, there’s something nice about DHI. Like LGIH, they made it through the housing bubble, although the stock price only recovered last year. Their scale is incredible and they are exposed to all levels of the housing market. They sell almost 10X as many houses as LGIH. They also pay a dividend, while LGIH has thus far just been pursuing buybacks. The P/E of DHI is slightly lower, though forward P/E is slightly higher.

    Reply
    • October 15, 2019 at 2:47 pm
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      Thanks for reading Steve. I’ll take a look at LGIH. It has not been on my radar.

      Reply
  • October 15, 2019 at 7:24 pm
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    Fun fact: The ticker symbol for Banco Santander used to be STD and at some point they changed it to SAN. Cultural issue perhaps?

    Glad you could catch a bid!

    Reply

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