Two new market neutral trades.

music selection:  “Beautiful Girl” — INXS

weigh-in:  207.0 (0.4)

I have one calendar spread left open (TOT) that I am looking to close. I might squeak out a few dollars of profit today if I can catch a bid. I continue to position my trades market neutral with one bull call spread and one bear put spread. I am also buying my spreads well in the money. The profit potential is lower this way but the probability of a profitable trade is much higher. Bulls and bears both make money but hogs always get slaughtered is my motto.

First up is a bear put spread in Conn’s (CONN). This is a discount retailer that is heavily dependent on extending unsecured credit to subprime borrowers  I expect them to be one of the larger victims when the credit cycle turns and I have a long-dated put in my portfolio as a hedge. Today, I’m adding a short term trade with the goal of generating income. I sold CONN200117P00025000 for 3.85 a share and simultaneously bought (using a combo order) CONN200117P00026000 for 4.65 a share. My net debit is 80 cents a share and likewise, the most I can lose on a spread is 80 dollars. The trade will be in force for 54 days and will be worth a dollar per spread at that time so long as the price does not move against me by more than 16.44%. This is a high probability trade with a nominal return of 25% or 169% annualized.

I also bought a bull call spread in Roku (ROKU). Roku is a leader in the cord-cutting phenomenon. They sell televisions and conversion devices that turn a set-top into a streaming device. The service is popular and generates a profitable subscription revenue stream. Roku has been one of the big growth story stocks for more than a year. I have two synthetic long spreads that are up 21,109 as of Friday’s close. Today, I’m making a short term trade for income. I bought ROKU200117C00140000 for 28.70 a share and simultaneously sold ROKU200117C00145000 for 25.20 a share. My net debit is 3.50 per share and the most I can lose per spread is 350 dollars. The trade enjoys 9.52% downside protection and will be in force for about 54 days. The nominal expected return is 43% and the annualized expected return is 290%.