The Turning Radius of an Aircraft Carrier (HYT,HD)

Perhaps the most difficult aspect of successful trading is the ability to change course midstream, to admit that the market has proven you wrong and get back on side.

 

Because, as you know, the market is never wrong.

Flexible

You, on the other hand, will often be wrong, and making money is predicated on you acknowledging your mistakes and adjusting. Anyone who’s too fixed in his ways, who lacks flexibility or is too proud, will ultimately find himself swimming straight out into the middle of the deepest waters, where, eventually, he’ll simply run out of gas and drown.

 

We pray that’s never our lot, though we have to admit to some doozy mistakes in our time. Along the way we learned that the biggest error you can ever make is holding on too long to a loser – long after the market has proven itself right – and you wrong.

 

Today we’re going to look at a pair of trades that are connected to the theme of reversing course and getting back in line with the market.

 

We start with an initiative launched on September 10th in a letter called No Worry. No Fear. Big Discount. There, we advised you on a stock purchase, something we don’t normally do at Options Trader Elite. The opportunity simply looked too inviting to pass it up.

 

We told you to buy shares of the BlackRock Corporate High Yield Fund (NYSE:HYT), a closed-end junk bond fund than was trading at a very deep discount to net asset value. Our recommendation came amid a flurry of sales across the junk sector and exceedingly bad press from nearly every corner of the financial press and blogosphere. Everyone hated junk. Defaults were up and even more were expected, spreads off treasuries had widened considerably and the shine had come off the sector in general.

 

Specifics

 

Our recommendation was to buy the shares for as low as $9.95 (it was then trading at $10.11) with a stop sell order placed at $9.45. If a loss was to be had, we figured best to cap it in the vicinity of between four and five percent.

 

Earlier this week, that loss was realized. HYT dropped to our stop, and we were kicked out like a pack of barroom troublemakers.

 

But not before earning some of that hefty 8.3% dividend that we discussed when we launched the initiative. We received payments of $7.00 per board lot traded in October, November and December, paring our loss to as low as three percent once yield was accounted for.

 

The chart of HYT now looks like this –

 

Technical 1

As you can see, it was Monday’s trade that triggered the stop and put the kibosh on our plans for high yield wealth and glory.

 

But what now? Is it time to short the high yield sector? Jump on the bandwagon with the rest of the crowd? Or is there something here worth reconsidering?

 

Normally, we’d be keen to reverse course in a situation like this, but the chart above indicates we may want to give it a second thought.

 

Consider –

 

  1. First, we have an oversold RSI read and subsequent steep pop higher for that indicator as the week bore on (blue circle).

 

  1. Next, we note the massive volume that accompanied the latest selloff (in black) – the highest weekly turnover on the stock in the fund’s entire twelve year history! – a development we read as supportive of a near certain intermediate selloff bottom.

 

  1. And finally, we have a classic Japanese candle reversal pattern (in red), in which, following a long black candle, we have a long doji then a straight ascent that tops the previous black candle.

 

This is a textbook, bullish love-in, friends. Taken together, these signals likely mean we’re headed toward the last retracement high at $10.50.

 

So…

 

So we’re not going to short high yield here. On the contrary, we’re going to reinstate the trade, take advantage of the very sweet 8.6% dividend that’s on offer and look toward some meaningful capital gains, as well.

 

Here is how we will play this for a nice profit:

 

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Ship

 

Our next trade under discussion is the November 26th Home Depot (NYSE:HD) short straddle that we wrote about in Straddling the War, Markets, Housing and Frida.

 

You’ll recall that we sold the HD December 134 straddle for a total credit of $5.51. Our thinking was straightforward: Home Depot had just shot higher, and we were convinced the market needed time to digest the gains. That meant sideways action for a month, and since HD options were richly priced at the time, we figured selling a straddle was the ideal way to go.

 

And it worked out wonderfully. Our straddle expires tomorrow, but we’re not taking any chances. We’re advising one and all to buy back both CALL and PUT without delay and put this baby to rest.

 

The numbers fall out like this –

 

The CALL is now trading for $0.13

 

The PUT is going for $1.81

 

Buy them both back and your cost for the trade is $1.94

 

That’s a 184% gain – $3.57 profit on $1.94 laid out.

 

Feels good.

100 dollar bill

Because we’re now going to reverse course on this sucker, and whereas we saw little volatility and sold a straddle back then, today we see things opening up. We’re using the proceeds to buy a straddle at the 132 level.

 

Options Trader Elite recommends you consider:

 

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Click Here to Receive this Members ONLY Options Play

 

Our Newsletters have yielded over

2,239% so far in 2015

2,007% in 2014 / 1,982% in 2013 /  2,125% in 2012.

In addition to access to our two weekly newsletters, Wall Street Elite and Options Trader Elite, you will also receive the 62 page Special Report, China’s Seven Most Troubling Trends…

 

Click Here to Join the Club

 

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Many happy returns on the season!

 

Matt McAbby

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