By: Steve Smith
This morning Options360 made a few adjustments to some of our current trades and I wanted to initiate a couple of new positions. These words…
’positions’ vs trading’ will likely shift our approach in coming weeks. I’ll be brief but I think it’s important to introduce how the Options360 investment approach is evolving over the coming months.
I don’t know about you, but it feels like Options360 has been spinning its wheels the past few months; I am happy that the portfolio is up 11.4% in a tough market — that’s outpacing the S&P 500, but I want to do better.
As we round the second half of the year, stocks seem to have found tenuous footing off lows as we await the next earnings season and the FOMC, both due around mid July. The question remains, can inflation be tamed without tipping the economy into a recession and just how bad earnings, particularly margins, will be pinched. The predictions of outcomes are wide and varied, however, lack of consensus can be our friend.
Option360 has always tried to adjust the given environment, hence the “unconstrained approach,” but I think in coming months it might become even more important to approach the market from one of positioning, rather than trading. It may sound like semantics, but I think two of the main the differences will be one of timeframes. Longer for positioning, and more latitude in sizing. Whereas I had kept each positions risk to 3%-6% of the portfolio. We may look to become more, or less aggressive depending on the risk/reward and the number overall outstanding positions.
The shift will be subtle, but I hope it helps deliver better, more consistent returns through the second half of the year.
I’ll have more thoughts in coming days, but let’s take a quick look at this morning’s alert that went out to our members.
Let’s start with adjustments to current positions in TLT, MCD, and new positions in SMH and SPY.
TLT current position is a diagonal spread, long 3 contracts July (08) 114 Calls and short 3 contracts June (7/1) 115 Calls at a net $0.45 cost basis.
Let’s roll just two contracts up and out. That is, close 3 of the 7/1s but only sell 2 contracts of the (7/08) $115.5.
This leaves the trade with a total cost or risk of about just $65 for the 3×2 contract position while maintaining significant profit potential should 1-year yields drop below 3.10%, which equates to around $116 on the TLT. This would result in a 67% total return.
- Buy to close 3 contracts July (7/01) $115 Calls
- Sell to open 2 contracts July July (7/08) $115.5 Calls
For a Net Credit of $0.41 (+/-0.10) Net Credit or $35-$45 for the 3×2 contract roll.
MCD current position is a 3 contracts iron condor in the 227.5/232.5P-352/357.5C in the (7/08) Expiry for a net premium collection of $1.15.
Let’s close 2 contracts to pare position and book some modest gains. We will hold 1 contract of the IC.
- Sell to close 2 contracts July (7/08) $227.5 Puts
- Buy to close 2 contracts July (7/08) $232.5 Puts
- Buy to close 2 contracts July (7/08) $252.2 Calls
- Sell to close 2 contracts July (7/08) $257.5 Calls
For a NET Debit of $0.85 (+/-0.10)
New Bull SMH
Lots of negativity building in the semi space even as China claims to be reopening factories and demand seems to be strong.
Micron (MU) reports earnings after the close tomorrow. It’s a bit of a commodity play in the sector but holds a 45% weighting in SMH and can swing sentiment.
Let’s use a basic calendar spreads to get some upside exposure in what I think is becoming a beaten down sector.
- Buy to open 1 contract Jul (7/17) $2125.Calls
- Sell to open 1 contract Jul 7/01) $212.5 Calls
For a Net Debit of $3.45 (+/-0.10)
SPY Bear Butter
Last for today, at the moment…. Let’s start building a position that represents my base case that the SPY will be back towards the 2/2019 pre pandemic high of around $335 as we head into a contentious political/macro season.
Let’s use a slow moving butterfly spread as a low probability, but high reward the SPY drifts another 20% lover over the next few months/
- Buy to open 2 contracts Sep (9/30) $380 Puts
- Sell to open 4 contracts Sep (9/30) $345 Puts
- Buy to open 2 contracts Sep (9/30) $325 Puts
For a Net Debit of $7.35 (+/0.15). These positions were all executed today; but they are not too late to get into tomorrow.
More importantly this will give you a front row seat as Options360 navigates what might be the most challenging, and rewarding 6 months in over a decade.
You can join this journey for the special offer of just $19 trial for a month trial.