Weekly Trades With Yields Up To 84%

Staying the course.

Music selection: “Space Age Love Song” — Flock Of Seagulls

Weigh-in: 211.0 +1.0

I continue to make two weekly trades. These are net debit spreads purchased in the money to position the portfolio for a high win rate. The yields are still very strong. One trade is bullish and the other is always bearish. Thus, I am positioning myself market neutral. Lately, I have focused on large cap stocks with low Betas. This reduces the yield somewhat but makes surprise moves in the wrong direction unlikely. Finally, I am doing the most rudimentary form of technical analysis by ensuring my bet is consistent with the 30 day price trend.

My bearish trade this week is a bear put spread in ICICI Bank (IBN). IBN has a 48 Billion market cap and a Beta of 0.75. No sudden moves are expected. With shares trading at 14.97, I bought the 16/17 bear put spread with 20MAR2020 expiry. The trade will be in force for 40 days and I got pricing of 92 cents per spread. I have 6.88% protection against an upside move (a big move for a low Beta mega-cap). So long as that doesn’t happen, the spreads will earn 8 cents profit each at expiry for an 8.7% yield or 79% annualized.

My bullish trade is in Duke Energy (DUK).DUK has an almost 70 Billion market cap and low-low-low Beta of 0.15. I purchased the 90/92.5 strike bull call spread for 2.29 each. The contracts are also on the 20MAR2020 expiry and have 40 days remaining. I have 3.6% downside protection and fully expect to earn the full profit of 71 cents per spread at expiry. That is good for 9% over 40 days or about 84% annualized.

These weekly trades only make up about a third of my allocation. I continue to be heavily invested in closed end funds with substantial yields (purchased at a discount to NAV), individual distressed bonds, as well as high yield REITs and BDCs. This income centric approach provides passive income equal to 98% of my spending in the previous year.

I think it is important if you are going to actively trade that you have passive income that covers your baseline spending. If you are compelled to make a trade, you cannot wait for the fat pitches. Sometimes the best trade you can make is NO TRADE. Don’t be afraid to sit on the sidelines. I’ve been fortunate to develop a system that provides good opportunities almost every week. I will not force a trade, however. In extended periods of low volatility, you may see me sit on the sidelines rather than take a risk for a trivial potential return.