I continue to position myself market neutral.

music selection:  “It’s Not Love” — Dokken

weigh-in:  209.0 +0.2

The market continues to roar higher (today being a Wuhan Corona exception).  At some point there will be a correction.  I hope to be positioned to make money whether the market is going up or down. Thus, two weekly trades, one bearish and one bullish.  I’ve tweaked the strategy again and am focusing on large caps with low Betas.  This will probably result in lower average yields but less volatility and a higher win rate.  I will continue to buy in the money for downside protection and have added a chart element.  I will consult the one month chart to ensure my trade is on the right side of the trend.

Today’s bearish trade is in Conoco Phillips (COP).  This is a 67 billion market cap monster.  The Beta is higher than I like but the one month trend is downward.  I bought a Bear Put Spread with 65 and 67.5 strikes and 21FEB2020 expiry.  The trade will be in force for about 26 days and enjoys 6.12% protection against a share rally.  Should I finish in the money, the earnings ratio will be almost 12% or 163% annualized.

The bullish trade takes me back to Zoetis (ZTS).  The animal medicine behemoth has an almost 65 billion market cap and a 5 year Beta of 0.80.  The short term chart is also in an uptrend.  Everything is set up for an in the money bull call spread.  So I bought the 125 and 130 strike spread with 21FEB2020 expiry.  The trade will be in force for about 26 days and enjoys 4.43% downside protection against a share fall.  Assuming this finishes in the money, the earnings will be 90 cents a share on 4.10 a share outlaid or 22%, which is 308% annualized.

I will take a loss this month on a TGT bull call spread but all other February expiries are on track to earn full profit.

Devour your prey raptors!

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Market neutral trading with yields up to 308%

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4 thoughts on “Market neutral trading with yields up to 308%

  • January 27, 2020 at 7:17 pm
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    Might also be a good time to place supports under your long stock positions. Puts have been relatively cheap until today. I plan to ride the wave up and then be caught by my safety line on the way down.

    Reply
    • January 27, 2020 at 9:49 pm
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      I still have 3 positions i’m trying to exit gracefully with covered calls. Everything else is some type of fixed income or hybrid security (66% or so of portfolio). The remaining third is half in bull call spreads and half in bear put spreads. I feel like I’m already playing enough defense.

      Reply
      • January 29, 2020 at 4:07 am
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        Good point. Based on the “open positions” page, you’re fairly well positioned for a stock market blow-off.

        The risk would be if one of the following occurred:

        a) A rise in interest rates of 1-2% might be serious pain for the BBBY, CBL, and ATF bonds.
        b) A wave of downgrades could drag the entire junk bond portfolio down – though I see you’ve smartly kept most durations short.

        What options do you have to hedge against interest rate risk, or an unfavorable series of defaults? Does IB allow you to trade fancy swaps? Would a bullish spread on the USD or treasuries hedge against a financial panic?

        Reply
        • January 29, 2020 at 11:31 pm
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          Thanks for reminding me about Open Positions page. I either need to update it or shut it down. It doesn’t reflect my current holdings very well as I’ve been sort of lazy.

          For my high yield bonds, you hit the nail on the head. The durations have been kept short. The intent is (unless the market offers me a gift rally for an early exit) to hold these bonds to maturity. Interest rate risk is then largely irrelevant. The whole point is to approach them as a binary position. Can it pay? If the answer is yes, the discount to par is gravy.

          IB would allow me to trade fancy swaps but I feel if I need them, I didn’t do enough due diligence to begin with and shouldn’t be holding those bonds! A spread on USD or treasuries would require, I think a long term commitment. I have positioned myself to be mostly short term in focus so I can pivot in a hurry when the inevitable crash comes.

          Reply

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