For the last four years, the opinions in the U.S. have become very bifurcated. It seems that there is no middle ground anymore. This is clearly obvious in politics but it also extends onto Wall Street. Last year, consensus was overwhelmingly cautious, yet here we are setting highs after highs in equities. Now everyone is playing catch up and there are a few theme trades to set against that backdrop for 2020.
Today we examine the possibility of trading the middle ground in the S&P 500 with the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), U.S. Bonds with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and the future of electric vehicles with Tesla (NASDAQ:TSLA). These are topics that have had investors divided over the years.
Opinions on any of these three tickers vary wildly and they always solicit heated debates even among friends. The real danger comes when emotions spill into trading habits. Today the challenge is to stay as agnostic as possible in our discussion to avoid mistakes. The following setups for each of these trades for 2020 are merely a few of hundred variations depending on investor time frames and portfolio balance.
Theme Trades for 2020: SPDR S&P 500 ETF Trust (SPY)
The S&P has been in a breakout bullish phase for years. In 2019 investors hesitated all year driven by fear of the economic war. But by the end of the year, investors went all in. The rally was fierce and now equity prices are defying all headlines. While this is exciting, it’s starting to get reckless. No, I am not a bear … I have been preaching upside all year last year when most experts were looking for a correction. But it always pays to be cautious when everyone else is being excessively optimistic.
Now is the time to put some balance in portfolios with a a few bearish bets that leave plenty of room for error. This is possible when using the options markets. There investors can sell bear call spreads against the S&P 500 via the SPY ETF.
May seems when markets like to take a pause. After all, there is a saying about that investors should “sell in May and go away.” I will use that saying as an example of an ideal theme trade for this year.
Sell the May $350/$355 bear call spread. This has a 90% chance of success and it would yield almost 10%. This works well in a portfolio that has bullish positions via stock or options. For other time frame setups, $342 and $345 would work for March and April respectively.
iShares 20+ Year Treasury Bond ETF (TLT)
Bond experts have been waiting for a collapse in bonds for years. The expectations were that these low rates have to end soon. Moreover, that when they do, they will die in a big bubble burst.
In theory that is true, but in reality all central banks are still committed to low rates. Case in point, the U.S. Federal Reserve last year recommitted to low rates. Now, the bond doomsayers have to delay their doomsday scenario for at least another year. This ultimately places U.S. Bond prices are in a buy-the-dip mode in 2020.
Since the idea of “There is no alternative” (TINA) showed up on the scene, going long the TLT ETF on dips has yielded great results. This highlights the fact that overseas money has no alternative than to buy U.S. bonds. So there is a safety net under the price of TLT.
An easy way to take advantage of this scenario is to use options and sell premiums below against proven support. Depending on the time frame, TLT has support near $136, $132 and $127 per share. To generate income from this, options investors can sell bull put spreads along the first half and beyond.
For balance and depending on the portfolio, investors can also sell some bear call spreads. But since the U.S. Fed is committed to low rates and since equities are near highs, it is better to overweight the put sales over the calls. Being long bonds also serves as a hedge to a portfolio that is long stocks. Money hides in bonds during dips in the stock markets.
The concept is easy and the choices are many. The two lower levels noted above work well for April, and May respectively. For balance, the bearish call spreads near $147 would work well. The idea is to sell the risk outside of the support and resistance lines so that they expire for maximum gains.
Tesla (TSLA)
Last but definitely not least is Tesla. TSLA shocked almost everyone on Wall Street with its insane rally — TSLA stock rallied almost 200% since June. Performance like this usually tempts short sellers. But so far, they have been handed losses in droves.
This rally is a confirmation that Tesla is still indeed a momentum stock. So when it rallies, it always seems ready to correct. But the timing of the cusp is tricky. When unsure of the reason behind the rally, investors need to be cautious with the assumptions. There needs to be a buffer zone. The options markets offer methods for this.
Fans of Tesla are undeterred and they think it’s going to the moon and fast. Critics are sure that it will be the short of the century. Somewhere in the middle lies the truth and that’s the actual trade structure here.
I understand the upside potential of TSLA, but I am leery of the actual car company arguments that are in the headlines. I wish management would resurrect more of the old headlines of Tesla the tech or energy company. So I remain skeptical of the extreme upside targets from this month.
Investors can bet against the extreme upside and sell the Tesla September $820 call and collect $10 per contract. This shorts the stock, but with a 70% buffer. Alternatively, a credit call spread would accomplish the same with limited risk.
The addition of a bullish leg would balance the first trade. Then the bet would be completely against the extreme opinions, not the company’s stock.
Sell the Tesla September $240 put and collect an additional $6 per contract. Ideally, you need Tesla to stay between this and $820 per share for maximum gains. Otherwise, you would accrue losses above $224 and below $836 per share. You would also want to wait for a pullback before selling the put side risk.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
