YESTERDAY shortly before noon, I filmed my weekly In The Money segment with Fidelity Investments. Click below to watch and see my notes below the video:
Here are my notes from today’s show:
Macro: Last week, we discussed the potential for rising rates and rising inflation causing investors to rethink valuations of some sectors that have benefited from the response to the pandemic, low rates, and lots of stimuli. Over the last few days, we have seen some extreme volatility.
Trade Idea #1: Bullish Verizon
Last week, famed investor Warren Buffett disclosed a more than $8 billion stake in shares of Verizon (VZ). Buffett, a value investor, sees a stock trading 11x 2021 eps expectations, a high dividend yield of 4.4%, a deep moated business with high margins, especially relative to its peer AT&T (T). The stock has gone nowhere in two years, trading just below its average of the last two years. The stock has good technical support between $53 & $54 and healthy technical resistance near $62:
Bullish Trade Idea: Buy-Write, Buy 100 Shares of VZ at $57 and sell 1 June 62.50 call at 60 cents
Break-even on June expiration:
Profits of the stock up to $62.50, above $62.50 the stock would be called away with an effective call-away level at $63.10 (the strike + the call premium), so up 10.5% in 4 months.
If the stock is 62.50 or higher, could always cover the short call to keep the long stock position intact. Also, the company will pay about a 63 cent quarterly dividend between now and expiration. This is like nearly doubling the quarterly dividend if the stock is under 62.50.
Trade Idea #2: Bullish Industrials etf XLI, top holdings HON, UNP, CAT, UPS, BA
Over the last week, we have seen rising rates cause investors to sell growth sectors like tech and move into more cyclical names that should benefit from a global relation trade, which is what rising interest rates are suggesting… the technical set up in the XLI looks attractive, breaking out to new highs this week:
Bullish Trade Idea: XLI ($92.60) Buy April 95 – 100 call spread for $1.40
-Buy to open 1 April 95 call for $2
-Sell to open 1 April 100 call at 60 cents
Break-even on expiration:
Profits of up to 3.60 between 96.40 and 100 with max gain of 3.60 above 100
Losses of up to 1.40 between 96.40 and 95 with max loss of 1.40 at 95 or lower
Rationale: this trade idea risks 1.5% of the etf price, has a break-even up ~4%, and a max potential gain of nearly 4% if the etf is up 8% in two months.
Bullish Trade Idea: JBLU ($14.50) Buy 1 March 15 call for $1.15
A little more than a month later, shares of JBLU are trading at $19.60, very near a new 52-week high and the March 15 call is worth $4.65. It makes sense to close this call with a little less than a month to expiration and possibly roll up and out. For instance, take a portion of the $3.50 profit and buy 1 of the June 20 calls for $2.20.