Trade Summary: February 16, 2016

| February 16, 2016

February 16, 2016

 

Trade Rationale

Friday put a halt to the slide in the equities markets, but there’s still plenty of damage that’s been done.  The S&P 500 is down 7% on the year which is bad enough, but the Nasdaq 100 is even worse off, down 11%.  Crude oil still takes the cake though, down 21% year-to-date.

While I’m hopeful the market is going to break these bearish ways soon, this week’s theme is going to be all about safety.  Rather than focus an entire theme on downside protection, which will only profit if the selling intensifies, I’m taking a more subtle approach to protecting our portfolio.

We’re going to go long gold, long a defensive stock, and short a higher risk ETF.

The first company we’ll buy calls in is Newmont Mining (NEM).  Investors have gone back to the traditional safe-haven trades these past couple weeks, which means investing in gold, utilities, and bonds.  What better way to get long gold than purchasing calls on a $13 billion mining company with strong fundamentals?

For our defensive stock, we’re going buy calls in Colgate-Palmolive (CL).  I’m a big fan of personal products companies during bearish/recessionary markets.  After all, people always need toothpaste and dish detergent, right?

Finally, we’re going to buy puts on SPDR Barclays High Yield Bond ETF (JNK).  The junk bond (high yield bond) market has gotten crushed this year, but could easily fall farther if the carnage in stocks continues.  JNK puts will give us a cheap entry to downside protection if we hit another major bout of selling in the coming months.

 

Trade Details

#1) Buy Newmont Mining (NEM) April 15th 26 Calls up to $2.10

For this trade, we’re looking for NEM to continue climbing.  Our first profit point for conservative traders is at $28.  For aggressive traders, you can hold up to $30.  For risk control, the conservative exit level is $22.  $20 is the final exit level for aggressive traders.

Newmont Mining

#2) Colgate-Palmolive (CL) May 20th 67.50 Calls up to $2.25

With this trade, we’re also looking for a move higher.  Our first exit point for conservative traders is at $69.  For aggressive traders, you can hold to $71.  For risk control, the conservative exit level is $63.  And, $61 is the final exit level for aggressive traders.

Colgate-Palmolive

#3) Buy SPDR Barclays High Yield Bond ETF (JNK) June 17th 32 Puts up to $1.85

Finally, we’re looking for a down move in JNK.  Our first profit-taking exit point for conservative traders is at $30.50.  For aggressive traders, you can hold to $29.50.  For risk control, the conservative exit level is $33.50.  $34.50 is the final exit point for aggressive traders.

SPDR Barclays High Yield Bond ETF

 

Category: AOA Trade Summary

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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