Trade Alert: The Bond King’s Fall

I have four actions for you to take today, including closing a trade for a 10% gain in less than two months.  In addition, I have a new opportunity to collect income, so let’s start there.

Over the weekend, I watched something I thought I would never see happen (and no, it wasn’t Ronda Rousey losing her first UFC fight). I’m talking about the Denver Broncos benching Peyton Manning, one of the greatest quarterbacks to ever play.

But they did it with good reason — the instant Hall of Famer was atrocious.

And right now, there’s a Hall of Fame investor who may be in the same boat — Bill Gross.

Gross is one of the greatest fixed-income investors to have lived, and he will be remembered for his time at PIMCO, where he reigned as the “bond king” for years.

But age seems to be getting the best of him. Bill Gross is 71 years old. Like 39-year-old Peyton Manning, his prime years are likely behind him. To put it in perspective, Gross’ peers — other accomplished investors — are under 60.

After filing a nasty legal dispute with his former company, Mr. Gross is now witnessing outflows from his current managed accounts at Janus Capital (NYSE: JNS) — an investment house that put a lot of capital into Bill Gross continuing his reign as bond king.

Without Bill Gross being able to pull in large accounts, Janus Capital is in for some tough times ahead.

The outflows Janus experienced were from George Soros, a billionaire hedge-fund investor, and it amounted to nearly 25% of Bill Gross’ assets under management. After that outflow, Bill Gross is managing merely $1.6 billion in funds. Conversely, at PIMCO, he managed a $270 billion fund.

When news broke that Gross jumped to Janus to work and grow their business, shares surged 43% and have yet to suffer a pullback. Investors are clearly putting a lot of confidence in his ability to bring in fund growth, but that has yet to happen.

In fact, in the year he has been with Janus, Bill’s managed accounts have underperformed compared to 73% of similar managed accounts — and he even underperformed his previously managed bond fund at PIMCO.

This is a sign that trouble may be brewing for Janus Capital, which needs Bill to start outperforming and attracting new capital to live up to the hype he brought with him. Anything short of this could send shares racing back toward the $11 they fetched before Bill joined the company.

In short, Janus Capital has a rough road ahead, and I believe shares are set to fall further in the coming months. To benefit from this, let’s sell naked calls on Janus Capital.

Action to take: Set a Good ‘Til Canceled limit order to sell to open the JNS January 2016 $16 call option (JNS160115C00016000) at $0.55. At last glance, it was trading at $0.55. If your order is not filled by Friday’s close, cancel it and I will update you in my next dispatch.

How the Trade Works

Since each contract covers 100 shares, you will collect $55 per contract sold.

In a cash-secured call transaction, in which you keep enough cash in your account to buy and sell that amount of stock, you will need to deposit $1,600 with your broker. This will give you a yield of 3.4% ($55 divided by $1,600) in just two months.

If you use margin, you will need to deposit about $320, a fifth of the full amount, with your broker. This will give you an impressive yield of 17.1% ($55 divided by $320) in less than two months.

Capital Requirements

By selling calls, our risk is that shares rise. That’s why I have picked a stock I believe is poised to fall. If shares are below our $16 strike price by January 15, we will keep the premium we collected and move on to another trade.

We won’t have to worry about our shares being above our strike price on the expiration date, because I will close the position prior to then.

If shares seem like they’re starting to rally, I will close our trade to limit losses, so pay close attention to your inbox. On the other hand, if the stock moves lower in quick fashion, I will look to lock in the majority of premiums we already collected.

Lock in Profits on Abercrombie

In late September, we sold naked calls on Abercrombie & Fitch (NYSE: ANF) as an introduction to this new strategy — and it worked out perfectly. In just a month and a half, we’re locking in a yield of 10%. The company has earnings in just a few weeks, and I don’t want to risk an upside surprise wiping away these gains we can already lock in.

So let’s buy these call options back to close them out and secure our profits.

Action to take: Set a Good ‘Til Canceled limit order to buy to close the ANF December 2015 $24 call option (ANF151218C00024000) at $0.30. At last glance, it was trading at $0.30. If your order is not filled by Friday’s close, cancel it and I will update you in my next dispatch.

With this trade, we are locking in $0.50 per share in premium, which equates to a 2% yield in a cash-secured account or a 10.4% return in a margin account in less than two months. In short, our new strategy is working for us.

Maintain Protection

We have several options set to expire this month, so you can expect an update from me on Friday. Although most of those don’t warrant any action to take, one does.

When we were put the stock in AES Corporation (NYSE: AES) in late August, we immediately added protective puts and covered calls. Fortunately, our puts paid off: Our calls will expire worthless, meaning we keep the premium we collected.

We need to close the put options to lock in the gains we made, which will help offset our losses. But the market remains extremely volatile. I don’t want to leave our position unprotected, so we’re going to grab another protective put option to protect ourselves from further losses.

Action to take: Sell to close the AES November 2015 $11 put option (AES151120P00011000) at the market. At last glance, it was trading at $1.35.

Action to take: Buy to open the AES February 2016 $10 put option (AES160219P00010000) at the market. At last glance, it was trading at $0.85.

With the November put option, we paid $0.60 for protection from losses if shares fell below $11 before this Friday. Shares are trading at $9.60 as I write this, which means we are able to sell our protective put option for more than 100% of what we paid for it.

As you can see, maintaining protection definitely paid off for AES. While this doesn’t generate profits for us yet, it lowers our cost basis since we add that extra money to our total return. So while the stock has fallen 26% from our strike price, our return is only down about 14% after accounting for option income and dividends.

We’re also maintaining downside insurance by purchasing another put option. This allows us to sell our shares for no less than $10 by February if we so choose. Or we can always close it out early as we are doing now if shares continue to fall. Ideally, shares would rise and our insurance would be meaningless. But even in the worst-case scenario, we are limiting our paper losses to less than 20%.

We will continue to collect a 3% dividend yield, and I will manage us out of this position with a profit in the months ahead. I’ll update you on our other expiring options this Friday.


Chad Shoop
Editor, Pure Income