There are several great trade ideas from the morning post at PSW as we’re back on Bloomberg TV tomorrow – adjusting our Money Talk Portfolio but the two new ones we’re adding are very appropriate as Top Trade Ideas.
The first is SQQQ, which is similar to the Member Trade we did on October 13th. I love it because we’ll almost certainly end up with $110,000 worth of free insurance after making an initial $20,000 investment in our hedge.
The second play is BCS – who just disappointed on earnings today but it’s nothing we didn’t expect and we like it as a long-term pick-up here:
Given the overall uncertainty in the markets, I’d like to place a hedge in the portfolio BUT, given the overall uncertainty – I’d like not to have a big loss if the market keeps going up. Two weeks ago, we came up with a clever hedging solution for our Members for our Short-Term Portfolio and, for the Money Talk Portfolio, I’m going to do something very similar to what we did on the 13th:
- Buy 100 SQQQ 2025 $20 calls for $6.70 ($67,000)
- Sell 40 SQQQ 2025 $30 calls for $5.00 ($20,000)
- Sell 60 SQQQ Jan $35 calls for $4.50 ($27,000)
What we have is a net $20,000 investment in a potentially $130,000 spread. SQQQ is a 3x inverse ETF on the Nasdaq so, for it to gain 75% to $35, the Nasdaq would have to drop 25%. Hopefully that does not happen but, if it does, we make $110,000 to offset our losses.
There’s also an income-producing component here as we sold 60 of the Jan $35 calls short for $27,000 and that’s using just 87 of the 451 days we have to sell so, if the Nasdaq does not pop higher, in January we’ll sell another set of short calls and another in April an, before you know it – we have FREE INSURANCE! Who doesn’t love free insurance?
Since we have free insurance and plenty of CASH!!!, let’s add a bank to our portfolio and Barclays (BCS) just disappointed on earnings by announcing they are taking charge-offs in Q4 – so that disappointment stands ahead. Fortunately, BCS is on our Watch List so we’re well-aware of the issues and $6.50 is a good $2.50 (38%) below fair value so this is a great time to learn a Stupid Options Trick and buy the stock for half price so we can collect that 0.38 annual dividend.
- Buy 5,000 shares of BCS for $6.50 ($32,500)
- Sell 50 BCS 2026 $5 calls for $2.25 ($11,250)
- Sell 50 BCS 2026 $7 puts for $1.60 ($8,000)
That’s net $13,250 for 5,000 shares ($2.65/share) and we will collect about 0.10 ($500) per quarter in dividends for 9 quarters ($4,500) and, if called away at $5, another $25,000 less whatever amount we are below $7 but, even if we’re just at $5, it’s net $19,500 back for a profit of $6,250 (47%). That’s what happens if we drop $1.50 to $5.
If we rise 0.50 to $7, then we end up with $16,250 in profits (260%) in two years. Our worst-case scenario is being assigned another 5,000 shares at $7 ($35,000) and, if we lose the initial $13,250 entirely, we’ll have 10,000 shares at net $48,250 ($4.825/share), which is STILL a 25% discount to the current price – that’s our WORST case! Aren’t options fun?