THE WEEK AHEAD: TAX LOSS TIME; OIH/XOP/XLE, XRT, JNK
With but a few trading days left in 2018, it's time to consider taking tax losses in non-tax deferred accounts
Personally, I flattened out of virtually everything on Friday, taking my lumps here particularly in my SPY, QQQ static, defined risk core positions in this fairly atypical year-end sell-off so that I can start off 2019 fairly clean, with smaller 2018 capital gains being the small consolation prize. Nevertheless, I still have a few crap piles left that I'll continue reducing cost basis on because I don't need the losses here and/or want to hold on to them for potential use next year, as well as a couple things that have "magically" worked out in the short- to medium term that I don't want to take gains on.
Along with this broad market sell-off, however, comes potential opportunities, and I've been pouring over sector exchange-traded fund charts to see where the comparatively huge weaknesses lie for potential bullish assumption plays to start off the new year. Here are a couple of preliminary ideas, the brass tacks of which I'll get into after we ring in the new year.
OIH/XOP/XLE
Pick your poison. With oil crashing from a high of nearly 77/barrel at the beginning of October to finish Friday at $45.42, OIH, XOP, and XLE have followed suit, with OIH hitting lows not seen since the turn of the century; XOP and XLE aren't far behind.
The play: I generally favor upward call diagonals, since you can fiddle with front to back month duration, and therefore maximum per trade exposure as compared to WOF*-fing or SPACK**-ing which subjects you to full notional risk, meaning that you'll have to mentally aside the buying power for those in order to take on a full one lot of shares (13.65 for OIH, 25.35 for XOP, and 56.11 for XLE) if you're going the WOF/SPACK route. Going longer dated with the back month requires a wider diagonal spread for an ideal setup (break even at or below market price of underlying; debit paid <75% of the spread width), so you can tailor the setup to your account size and/or risk appetite for the play; personally, I don't like to go with anything shorter than split month, since I like to have plenty of opportunity to reduce cost basis, and a one-month doesn't give you that, in my opinion.
You'll naturally want to compare and contrast whether going call diagonal versus naked short put gives you buying power relief on margin, particularly for something like OIH, which was trading at 13.65 as of Friday close. The buying power effect of a 13 short put, for example, should be about 20% of notional, or 2.60. In a cash secured environment, you'll generally always get relief, since the short put would invoke 13.65 in notional/buying power, and a 90/30 upward call diagonal regardless of which expiry you use for the back month is unlikely to involve something greater than a 13-wide.***
XRT
Fourth quarter earnings are generally the best quarter for retail, given the amount of cash people lay out for the holiday season. XRT is at long-term range lows, so I like a bullish assumption play to take advantage of this seasonality, with the front month in fourth quarter earnings season (Jan or Feb) and the back month in the next (March or April), since earnings are likely to contract off of their holiday peaks.
As with the OIH/XOP/XLE bullish assumption play, you'll want to compare and contrast a short put over the relief you'd get over doing a 90/30 diagonal, and evaluate whether the possibility of taking on full notional risk is something you want to do given your risk appetite and/or account size.
* -- "WOF" -- "Wheel of Fortune" put sold at the nearest the money strike. Run to expiration, you keep the premium if it expires worthless. If assigned, you proceed to sell calls against.
** -- "SPACK" -- "Short Put/Acquire/Cover" put sold generally at the 20-30 delta. Run to expiration, you keep the preem on worthless expiry. As with the WOF trade, you proceed to sell calls against, at or above your cost basis.
*** -- The OIH April 18th 30 delta short call strike is at the 16, so a 13-wide would be a back month at a 3 strike. The lowest strike available in any expiry is a 10.
JNK
Yes, junk. With a 5.88% yield as of Friday close (1.98/share annually; 1198/ONE lot versus TLT's 2.85%), junk is attractive from a yield perspective and could be a decent place to park cash here while the equities markets gyrate themselves out. Nevertheless, well, it's "junk," and really the only way I want to be in it is if I can fully hedge it while sucking in the divvies.
This is how the setup would work. First, price out the next monthly at-the-money/out-of-the money short call vertical. For example, the March 34/36 short call vertical is paying .33 at the mid with a delta metric of -27.16; sell it. Because it's -27 delta, you'll want to buy 27 shares of JNK, resulting in a delta neutral, fully hedged position. Naturally, you'll have to manage it as you would any other position, rolling the short call vertical down or out in time to keep the full setup (stock + short call vert) in delta balance, with the downside being that if price moves up into your short call vertical, you'll have to in all likelihood widen it out to receive a credit for it on roll. Of course, 27 shares of JNK is probably not going to rock your world with divvies, but you can scale up over time or at the gate.
Personally, I flattened out of virtually everything on Friday, taking my lumps here particularly in my SPY, QQQ static, defined risk core positions in this fairly atypical year-end sell-off so that I can start off 2019 fairly clean, with smaller 2018 capital gains being the small consolation prize. Nevertheless, I still have a few crap piles left that I'll continue reducing cost basis on because I don't need the losses here and/or want to hold on to them for potential use next year, as well as a couple things that have "magically" worked out in the short- to medium term that I don't want to take gains on.
Along with this broad market sell-off, however, comes potential opportunities, and I've been pouring over sector exchange-traded fund charts to see where the comparatively huge weaknesses lie for potential bullish assumption plays to start off the new year. Here are a couple of preliminary ideas, the brass tacks of which I'll get into after we ring in the new year.
OIH/XOP/XLE
Pick your poison. With oil crashing from a high of nearly 77/barrel at the beginning of October to finish Friday at $45.42, OIH, XOP, and XLE have followed suit, with OIH hitting lows not seen since the turn of the century; XOP and XLE aren't far behind.
The play: I generally favor upward call diagonals, since you can fiddle with front to back month duration, and therefore maximum per trade exposure as compared to WOF*-fing or SPACK**-ing which subjects you to full notional risk, meaning that you'll have to mentally aside the buying power for those in order to take on a full one lot of shares (13.65 for OIH, 25.35 for XOP, and 56.11 for XLE) if you're going the WOF/SPACK route. Going longer dated with the back month requires a wider diagonal spread for an ideal setup (break even at or below market price of underlying; debit paid <75% of the spread width), so you can tailor the setup to your account size and/or risk appetite for the play; personally, I don't like to go with anything shorter than split month, since I like to have plenty of opportunity to reduce cost basis, and a one-month doesn't give you that, in my opinion.
You'll naturally want to compare and contrast whether going call diagonal versus naked short put gives you buying power relief on margin, particularly for something like OIH, which was trading at 13.65 as of Friday close. The buying power effect of a 13 short put, for example, should be about 20% of notional, or 2.60. In a cash secured environment, you'll generally always get relief, since the short put would invoke 13.65 in notional/buying power, and a 90/30 upward call diagonal regardless of which expiry you use for the back month is unlikely to involve something greater than a 13-wide.***
XRT
Fourth quarter earnings are generally the best quarter for retail, given the amount of cash people lay out for the holiday season. XRT is at long-term range lows, so I like a bullish assumption play to take advantage of this seasonality, with the front month in fourth quarter earnings season (Jan or Feb) and the back month in the next (March or April), since earnings are likely to contract off of their holiday peaks.
As with the OIH/XOP/XLE bullish assumption play, you'll want to compare and contrast a short put over the relief you'd get over doing a 90/30 diagonal, and evaluate whether the possibility of taking on full notional risk is something you want to do given your risk appetite and/or account size.
* -- "WOF" -- "Wheel of Fortune" put sold at the nearest the money strike. Run to expiration, you keep the premium if it expires worthless. If assigned, you proceed to sell calls against.
** -- "SPACK" -- "Short Put/Acquire/Cover" put sold generally at the 20-30 delta. Run to expiration, you keep the preem on worthless expiry. As with the WOF trade, you proceed to sell calls against, at or above your cost basis.
*** -- The OIH April 18th 30 delta short call strike is at the 16, so a 13-wide would be a back month at a 3 strike. The lowest strike available in any expiry is a 10.
JNK
Yes, junk. With a 5.88% yield as of Friday close (1.98/share annually; 1198/ONE lot versus TLT's 2.85%), junk is attractive from a yield perspective and could be a decent place to park cash here while the equities markets gyrate themselves out. Nevertheless, well, it's "junk," and really the only way I want to be in it is if I can fully hedge it while sucking in the divvies.
This is how the setup would work. First, price out the next monthly at-the-money/out-of-the money short call vertical. For example, the March 34/36 short call vertical is paying .33 at the mid with a delta metric of -27.16; sell it. Because it's -27 delta, you'll want to buy 27 shares of JNK, resulting in a delta neutral, fully hedged position. Naturally, you'll have to manage it as you would any other position, rolling the short call vertical down or out in time to keep the full setup (stock + short call vert) in delta balance, with the downside being that if price moves up into your short call vertical, you'll have to in all likelihood widen it out to receive a credit for it on roll. Of course, 27 shares of JNK is probably not going to rock your world with divvies, but you can scale up over time or at the gate.
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