Hey There Income Hunters,
Welp, we’re back to politics as usual.
Did Chuck Schumer actually think he would get enough Republican votes to begin a debate on blank sheets of paper? (Otherwise known as the infrastructure bill.)
Then you have Bernie Sanders, the lead on the $3.5 trillion budget blueprint running around trying to get all 50 Democrats on board:
Not sure if there is much meat on that budget bone …
We are talking about universal pre-kindergarten, two free years of community college, Medicare coverage of dental and vision and extended child tax credits.
The bill also imposes new energy standards on utilities — the same utilities that are supported by our government …
So we’re talking about more legislation behind this that will be needed to fund an upgrade of our power grid.
(That money, of course, will come from massive corporate and individual tax increases and a carbon tariff.)
I don’t expect the bill to generate much growth, but it will certainly fuel demand for more government spending in 2022 and beyond.
While the fate of the two bills is TBD, I have a trade that is set to make great returns if the bills pass — while also being profitable if they don’t.
A Vertical Option Strategy With Benefits…
I am a huge fan of put and call spreads. The ability to get leverage inexpensively is hard to pass up.
Of course, if you get the direction wrong, you lose everything if held to expiration.
The trick is to find a cheap enough strategy so that you can hedge your bet.
Let me explain …
Look at the iShares Silver Trust (Ticker: SLV) chart …
Notice how low the historic vol is in the chart above (blue line at bottom) …
Next, check the volatility curve in the strikes we are interested in …
I am looking at buying the 23.5-strike at 25.15% vol and selling the 25.5-strike at 28.88% vol. That gives us a bit of an edge in valuation of the spread …
So, I can get the spread on for $.45, which offers over a 3.5:1 risk/reward ratio.
Note: When calculating the maximum you can make on a put or call spread, take the difference in strikes and subtract the cost to get net profit
In this example, the cost is $.45. Gross profit is the difference in strikes — or $200 — and net profit is $200-$.45 = $155…
Rate of return is net profit divided by initial outlay or 155/45 = 340%.
Here is the risk profile on the spread …
How Can I Protect My Downside in SLV?
With volatility priced so low, plus the upward sloping vol curve, the spread is cheap enough to consider buying a put.
Let’s take a look…
I can buy the SLV 22 put to Aug. 13 for $15. That only increases my total cost to $.60.
Let’s take a look at the risk profile now …
That’s right, now we have the downside protection.
A trade down to 21.5 is realistic, considering SLV dropped $2 within 30 days after the Fed started talking tough on inflation.
So, the put protects capital on a larger move down …
With the political battle in Washington and the Delta variant wild card it’s nice to be covered in both directions.
Bring It Home
If the Schumer bill and budget pass, the inflation story is alive and well.
However, I have zero confidence in the government and the Fed. (If you couldn’t tell.)
So, it’s nice to find a trade that ensures your exposure.
The strategy we discussed is ideal for playing the long-term inflation trade, while also attempting to preserve capital on a spike down, which has been a common occurrence with our flip-flopping central bank.
Have a great day, and as always …
Live and Trade With Passion My Friends,
Griff