Monday Trades With Yields Up To 2,076%

Staying market neutral.

music selection: “Ghost Of The Navigator” — Iron Maiden

weigh-in:  205.6 n/c

The market continues to be richly valued but lacking in direction. The S&P is locked in a range near 3,000 and could stay there sometime before a breakout either direction. Trade worries continue to loom on the horizon. War with Iran remains a possibility. Now is not the time to be elatedly bullish.

I bought a bull call spread on DR Horton (DHI). That is a home builder that is rallying over the last 18 months as new construction activity works through a backlog of under building new homes over the last decade. Low-interest rates should keep them growing. I bought DHI200117C00046000 for 7.567 per share. At the same time, I sold DHI200117C00047000 for 6.747 a share. My net debit is 82 cents a share and the trade will be in force for about 96 days. I have downside protection of 10.19% to defend against a move against me. So long as that does not happen, I will earn 18 cents per share on 82 put at risk. That is a return of 22% or 83% annualized.

I also bought a bear put spread on Santandar (SC). This is a highly leveraged bank that is overexposed to subprime credit and delinquent student loans. I think it is overvalued. I sold SC200117P00027000 for 2.61 a share and simultaneously bought SC200117P00028000 for 3.41 a share. My net debit is 80 cents a share and the trade will be in force for 96 days. With 7.70% downside protection, this trade is highly likely to finish in the money and earn 20 cents per share.  Against the 80 cents of capital at risk that is a 25% return or 95% annualized.

Finally, I bought a calendar spread in Boston Scientific (BSX). This is a large-cap company that is largely mature and has a slow-moving share price. It is a good candidate for a spread that bets on time decay in the absence of movements in the underlying. I sold BSX191129P00039000 for 2.02 per share. I also bought BSX200117P00039000 for 2.57 per share. The net debit (and my maximum loss on the trade) is 55 cents per share. Should all things remain the same between now and expiry of the short put in 47 days, the long put will be worth about 2.02 per share. The 1.47 in profit is good for 267% or 2,076% annualized. Calendar spreads are my lowest probability trade but also my highest earners. On net, buying calendar spreads on slow-moving mega caps is my best strategy. But you must be diversified and keep you position sizes reasonable.

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