I turned THC from a steep loss to a profit.

music selection:  “Raining Blood” — Slayer

weigh-in:  205.0 (2.6)

My bear put spread in Tenet Healthcare (THC) turned against me.  The position was originally opened on 9SEP2019 deep in the money.  The company almost immediately announced new management, a turnaround plan, and intent to sell non core assets to raise cash to pay down debt.  Shares rallied well past my profit point and looked like I was heading for a big loss.  I saw that the short puts were now well out of the money so I sold my long puts for 71 cents (a 76% loss) and kept my shot puts to be held naked.  Those have expired and I squeaked out a 35 dollar gain on the position.  This is how options sometimes let you be a winner even when you get the lay of the land completely wrong.

The first of this week’s three option trades is a bearish position on Peloton (PTON).  This is a maker of (in my opinion overpriced) exercise equipment.  Their biggest product is a stationary bike with a tablet attached.  The tablet streams (via subscription) a motivational workout leader time to music.  The company has serious problems.  It IPOd well into fervor for rapid revenue growth.  But company loses money faster as it grows and has no path to profitability.  To make matters worse, the company failed to license its music (a core part of the experience) and now faces hundreds of millions of dollars in lawsuits.  There is now significant competition from several stationary bike makers that are replicating the “add a tablet, music, talent” model for less than half the price PTON charges.  I think the company is ultimately worth zero in bankruptcy.  I already have long dated long puts as part of my hedging strategy but now I want a bear put spread for some short term income.

I sold PTON200117P00025000 for 5.15 a share and simultaneously (using a combo order) bought PTON200117P00026000 for 5.95 per share.   My net debit is thus 80 cents per share and the trade will be in force for about 82 days.  With 12.46% downside protection, unless shares rally more than about 13% in that time, my spread will be worth 1.00 per share at expiry for 20 cents of profit.  That is a 25% in 82 days or 111% annualized.

I am also making a bullish bet in Home Depot (HD).  Some of you will have to pinch your nose at the founder’s politics.  I prefer to ignore such noise and just make money from the markets.  These are good times for HD.  New home construction is on the rise and interest rates for HELOC home remodeling loans are very low.  The company is seeing strong revenue and is in an uptrend.  I bought HD200117C00225000 for 15.325 per share and with a combo order also sold HD200117C00230000 for 11.825 per share.  My net debit is 3.50 per share and the trade will be in force for about 82 days.  It comes with 2.47% downside protection against erosion of the share price but I don’t expect to need it.  If shares finish in the money, the spread will be wroth 5.00 a share at expiry for 1.50 per share in profit.  That is 43% over 82 days or 191% annualized.

Finally, is this week’s calendar spread.  I have chosen megacap Total S.A. (TOT).  The company is slow moving and well suited to a calendar spread that bets on stability and the time decay of its short leg exceeding the time decay of its longer date long leg.  I used a combo order to sell TOT191220P00055000 for 2.455 per share and simultaneously buy TOT200221P00055000 for 3.501 per share.  My net debit is about 1.05 per share and the trade will be open about 54 days.  If the price of the underlying remains unchanged and there are similarly no changes in implied volatility, the long put will be worth about 3.05 at the expiry of the short put.  The 2.00 in profit is good for 290% in return over that 54 days or 1,963% annualized.

My net debit spreads are working out well.  I still need to gracefully exit some long positions via covered call to raise cash for the next downcycle (to be deployed in distressed bonds).  I’d also like to strategically start reducing my short exposure to VXX (currently showing 45.86% profit.)  I’ll be back Friday with my monthly Financial Transparency report.  That is going to include reporting on my tIRA to Roth conversion of about 13,000 in positions and cash.

Devour your prey raptors!

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New options trades with projected yields up to 1,963%

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2 thoughts on “New options trades with projected yields up to 1,963%

  • October 29, 2019 at 3:41 pm
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    Kind of a bold move to keep the short put in THC even as it rallied. Glad it turned into a winner. What was the thought process? Did you bet that time decay would likely exceed any gains from that point? Any reason you didn’t roll the whole spread higher or longer?

    Reply
    • October 29, 2019 at 7:08 pm
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      It was 15% out of the money by the time I decided to sell the long put. And I had several thousand in time value left. I figured with a 20% decline to narrowly back in the money, I’d still come out ahead by letting some time value tick off.

      Reply

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