More of the same.
music selection: “Clint Eastwood” — Gorillaz
weigh-in: 211.2 (0.8)
Wuhan Corona virus appears to be weighing heavily on markets today. The S&P is down 90 points and the entire market is a sea of red. I continue to position myself market neutral with two weekly trades, one bullish, one bearish. Furthermore, I consult the one month chart to ensure the price action is confirmed and am focusing on low Beta tickers with large market caps. I should have a high probability of success although possibly lower potential returns.
This week, my bullish spread is in Eli Lilly (LLY). Lilly has a market cap of almost 175 Billion and sports a Beta of only 0.24. Sudden moves are unlikely. I bought the 125/130 strikes bull call spread with 20MAR2020 expiry for a net debit of 4.6771 per share. The trade will be in force for about 26 days and sports 7.84% downside protection which is a lot for a low Beta mega-cap. Should the downside protection not be breached, the maximum profit of 226 dollars (7 spreads) will be earned for a return of 6.9% or about 97% annualized.
My bearish trade is in Edison International (EIX). Edison is about as boring as you can get. It is a regulated electricity utility with a market cap of 28 Billion and a Beta of 0.21. Recent price action is almost exactly sideways. I bought the 82.5/85 strikes bear put spread with 20MAR2020 expiries for 2.2364 per share. The trade enjoys 6.48% downside protection against an upward share move and will be in force for about 26 days. Should the downside protection not be violated, the maximum profit of 369 dollars will be earned (14 spreads). That is good for almost 12% or 165% annualized.
I also have a limit order open to sell a covered call on International Paper (IP). I still hold the shares and am trying to exit gracefully around breakeven. Shares have traded sideways for months. I’m glad to hold for the dividend if I can’t get my price.
Anytime you can make trades with a high probability of success and an expected return over 50% you can expect to do well. I’d like to caution any ravenous lizards playing the “home game” to use sensible position sizing. A net debit spread has a non-zero chance of turning into a 100% loss (use a hard stop loss to avoid that!) That is why I keep approximately 65% of my portfolio in passive yielding investments. I prefer closed end bond funds trading at a discount to NAV. That provides a lot of stable ballast and attractive yield in one package.
Devour your prey raptors!