Two new bullish trades.

music selection:  “Even Though I Say” — Saint Asonia

weigh-in:  217.2 +0.2 (quarantine 15 is really getting to me.)

First up is an out of the money short put on American Express (AXP).  AXP is a great stock to own for the long term and I will not be upset about assignment at a great price as I would write covered calls against the position.  With shares trading just under 94 dollars, I sold the 85 strike AXP200821P00085000 for 2.25 a share.  The trade will be in force for 40 days and yields an expected 24.15% annualized while retaining 11.80% downside protection.  Eighty-five would be an excellent entry price in the unlikely event of assignment.  Historically high volatility allows for superior returns with greatly reduced risk in quality names.

My second trade is a pure momentum play.  I opened a bull call spread in Invesco QQQ Trust (QQQ).  With the NASDAQ hitting all time highs, it is clear an uptrend is in place.  And with the Fed providing unprecedented levels of monetary stimulus, I feel good about betting on the “cube”.  With shares trading at about 267, I bought the 245/250 bull call spread with 21AUG2020 expiry.  I paid 4.08 per share on the spread.  The spread enjoys 6.36% downside protection.  Should that not be exceeded, the full profit of 276 dollars (3 spreads) will be earned on 1,224 capital at risk. That is good for 23% over 40 days or 265% annualized.

With the uptrend and monetary stimulus I’m net bullish.  I’m still buying long dated puts on struggling names when I find deals.  And I’m looking for tasty “pairs trading” opportunities that would let me position market neutral while capturing some reversion to mean.

Devour your prey raptors!

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New trades with yields up to 265%

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4 thoughts on “New trades with yields up to 265%

  • July 14, 2020 at 10:54 am
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    You write that “expected 24.15% annualized while retaining 11.80% downside protection”. Where do you get these numbers? Thanks in advance for the education!

    Reply
    • July 14, 2020 at 2:48 pm
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      Investor,

      The annualized return is 2.25 in premium divided by the capital at risk (85). That gives the gross return of 2.647%. Divided by 40 days in force, times 365 days in a year comes to about 24.15% which is what you would earn if you could repeat this trade at every expiry for a year (no compounding).

      The downside protection is the break even point. Shares were trading at 93.82 when I made the trade. Thus the trade has maximum profit down to any price including 85. Break even is another 2.25 lower as the premium is yours to keep win lose or draw. (93.82 – 85 – 2.25) / 93.82 is about 11.80%. That is, if shares fall that far you come out even on your capital at risk. Anything lower results in a capital loss and anything more results in a capital gain.

      Thanks for reading!

      Reply
  • July 20, 2020 at 7:19 pm
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    Appreciate the detailed explanation – thank you.

    Do you perform any kind of modelling, say, Black–Scholes, in order to evaluate the risk?

    Reply
    • July 20, 2020 at 9:32 pm
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      Investor,

      Doing the B/S math is sort of overkill. In fact, the math is already done for you (for free!) at numerous online calculators. I sometimes look at “Delta” which gives you the percentage chance of your strike ending “in the money”. That is a pretty good indicator of risk, in my opinion.

      Reply

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