I am discontinuing the use of Calendar Spreads.

music selection:  “A Passage To Bangkok” — Rush

I have two new trades this week but first a little house keeping.  I have closed 19 calendar spreads so far.  Total capital at risk was about 19,000 and I earned about 380 in profits before commissions.  That is, I averaged about 2% (closer to 7% annualized) while enduring a lot of volatility and a large standard deviation of returns.  I still believe in the Calendar Spread approach as it can produce eye-popping returns in sideways markets. The current market just isn’t conducive to using the strategy due to high volatility.  I’ll keep that in my tool box for when market conditions are appropriate.  I have five Calendar Spreads still open and they are currently about break even collectively.  I’ll be strategically closing those trades over the next couple months.

I am going back to an old favorite Microsoft (MSFT) for a bull call spread.  MSFT is  a global software and cloud computing giant that has just won a coveted DoD project.  The stock is in a strong uptrend and has fantastic fundamentals.  It also trades cheap compared to its growth and profitability prospects.  I bought MSFT200117C00125000 for 24.83 a share and simultaneously sold MSFT200117C00130000 for 20.06 a share.  My net debit is 4.77 and the most I can lose on a spread is 477 dollars.  I have 9.96% downside protection in the trade before profit is threatened and expected earnings are 23 cents a share or about 5%.  The trade will be in force for 75 days and the annualized expected return is 23%.

I am also going back to Ford (F) for a bear put spread.  Ford is languishing amid growing sub prime auto lending and growing delinquency rates and defaults. The UAW also just gained concessions from General Motors and Ford can realistically expect to have labor difficulties as a result as well.  I sold F200117P00010000 for 1.02 a share and simultaneously bought F200117P00011000 for 1.97 a share.  My net debit is 95 cents a share.  The trade will be in force for 75 days and has downside protection of 10.62% thanks to being purchased that far into the money.  Expected return is about 5% or 26% annualized.

Both of these trades have a high probability of success.  The returns are far better than the long term average of a buy and hold indexer.  I’ll note that with this strategy, I think it is important to have a substantial fixed income allocation so you can rely on coupons when the market just isn’t offering up an options trade that works.  Sometimes the best trade you can make is no trade and having truly passive income in retirement offers the flexibility to wait for the next fat pitch.

Devour your prey raptors!

 

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One thought on “New trades with yields up to 26%

  • November 4, 2019 at 9:59 pm
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    Low volatility in the VIX sense has both made calendars too low-paying because the spreads are cheap and made debit spreads more lucrative because the spreads are cheap.

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