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Covered Calls, SPY and a Global Shift

02/01/2017 7:00 am EST


Marvin Appel

President, Signalert Asset Management LLC

President-elect Donald Trump will try to implement his campaign promises of pro-growth policies, infrastructure spending and tax cuts, asserts Marvin Appel, President of Signalert Asset Management, LLC.

As good as this fiscal stimulus sounds on the surface, Trump may have difficulties implementing them. Even the always bullish Wall Street strategists don't believe Trump will be able to spur much economic growth in 2017 as they are forecasting just a 4.3% rise in the S&P 500 Index.

This happens to be the lowest number since 2005. My expectation is similar to the consensus; a low single digit advance this year. As such, I believe a long-term covered call position, in the SPDR S&P 500 ETF Trust (SPY) - with a 7.8% profit potential - may be an appropriate strategy this year.

I believe a sound strategy would be to sell the January 2018 SPY calls with a $227 strike price and buy SPY. Assuming that you buy the SPY at $226.53 and collect $12.63 on the option, the premium will translate to 5.6%.

Moreover, there is $0.47 (0.2%) upside to the position since it's slightly out of the money. The total upside potential is 7.8% when you add the 2% dividend.

Most investors would be happy to see this level of return to their portfolio this year since institutional investors are expecting an appreciation of 6.3% in the SPY (4.3% forecast plus 2% dividend).

An additional advantage of this position is that you will realize the full profit potential with only $0.47 advancement in SPY.

Call premium will mitigate the portfolio risk which means that your investment will not lose money unless SPY closes below $209.31 (7.6% lower from the latest levels). It sure seems like a no brainer; however, your profit will be capped off at the aforementioned 7.8%.

Meanwhile, international stocks look better than U.S. stocks. The iShares MSCI EAFE Index Fund (EFA) is an ETF that offers international exposure to developed countries in Western Europe, Japan and Australia.

This investment has lagged the SPY since 2012 which led to many strategists recommending the ETF in the past several years. I believe 2017 may be the year that international stocks finally outperform U.S. stocks.

In addition to a possibly favorable relative strength versus SPY, EFA's monthly chart also looks intriguing. EFA seems poised to embark on a long term uptrend as the 19-39 month MACD is about to cross its signal line.

Moreover, EFA looks more favorable than SPY as the relative strength between them made an important positive divergence pattern. Therefore, I recommend switching some of your SPY position into EFA.

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