Trade Summary: October 18, 2016

| October 18, 2016

October 18, 2016

 

 Trade Rationale

The search for yield is an ongoing process, or at least it has been since interest rates hit rock bottom.  Most fixed income products, such as bonds, just aren’t paying a high enough yield to satisfy the needs of most investors.  CDs are even worse.

The low yield of many fixed income assets has pushed investors into dividend stocks, particularly in popular sectors such as utilities and REITs.  The demand for these types of products has sent their prices soaring, and we’re just now seeing a correction.  However, utilities and REITs still could have some downside left.

As such, I went out and found two high yield stocks which still have strong upside potential.  Conversely, we’re going to buy a put in an ETF which is at risk of dropping, particularly if interest rates rise.

We’ll start with calls on Ford (F).  The famous American car company hasn’t been on many investors’ radars in recent years.  However, the stock looks very cheap at current levels, and the dividend yield is over 5%.

Next, will look at buying calls in Blackstone Group (BX).  BX may be one of the largest asset managers in the world, but the stock has had a miserable year.  However, the share price now looks very attractive from a value standpoint, and the current yield is over 6%.

Finally, let’s buy puts on iShares iBoxx High Yield Corporate Bond ETF (HYG). HYG is the most popular ETF for junk bond investors.  Junk bonds have had a good year so far, but could be very close to a top.  Any expected increase in rates could send the HYG share price down several notches.

 

Trade Details

#1) Buy Ford (F) December 16th 12 Calls up to $0.60

For this trade, we’re looking for a move higher in F.  Our first profit point for conservative traders is at $12.50.  For aggressive traders, you can hold up to $13.50.  For risk control, the conservative exit level is $11.  Lastly, $10.50 is the final exit level for aggressive traders.

Ford

#2) Buy Blackstone Group (BX) December 16th 24 Calls up to $0.95

With this trade, we’re also looking for the stock to climb.  Our first exit point for conservative traders is at $25.  For aggressive traders, you can hold to $26.  For risk control, the conservative exit level is $22.  And, $21 is the final exit level for aggressive traders.

Blackstone Group

#3) Buy iShares iBoxx High Yield Corporate Bond ETF (HYG) December 16th 87 Puts up to $2.05

Finally, we’re looking for a down move in HYG.  Our first profit-taking exit point for conservative traders is at $85.  For aggressive traders, you can hold to $83.  For risk control, the conservative exit level is $89, while $91 is the final exit point for aggressive traders.

iShares iBoxx High Yield Corporate Bond ETF

 

Category: AOA Trade Summary

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