Richard Croft, president and chief investment officer at R.N. Croft Financial Group
Focus: Options and ETFs

MARKET OUTLOOK

I don’t see a recession on the horizon — at least not until after the U.S. election in 2020. U.S. manufacturing however is slowing, partly as a result of the trade wars. The U.S. Federal Reserve is being accommodative, reducing some of the risk this morphs into a slowdown for the rest of the economy.

Interest rates are expected to remain low for the foreseeable future. The U.S. consumer is in good shape, propped up by rising wages, the wealth effect of higher stock prices and a robust real estate market. Consumer sentiment remains positive, with the bulk of discretionary spending going towards services (software, computers, entertainment, restaurants and travel), which represent more than 70 per cent of U.S. GDP. Overall, financial engineering should buoy stock values into 2020.

UPDATE

Boeing stock closed below the strike price at the June 2019 expiration. The call option would have expired worthless and the investor would continue to hold the shares. There were points between June 2019 and the end of October when the shares traded above US$380. They fell back to the current price at the end of last week. Based on the continued uncertainty, I would suggest investors exit the position if they haven’t already done so.

TOP PICKS

Synthetic long AMAZON (AMZN:UW)

Buy AMZN Jan (2021) 1800 calls at $224.00
Sell AMZN Jan (2021) 1800 puts at -$193.00
Net per share out-of-pocket cost: $31

This option strategy should provide investors with a near identical return to owning Amazon shares outright, but at a significantly reduced cost. The recommendation is based on the health of the U.S. consumer and expectations of a robust Christmas season. If Amazon is able to crack one-day delivery it will be a game-changer and could open yet another revenue stream for the company.

Synthetic long MICROSOFT (MSFT:UW)

Buy MSFT Jan (2021) 145 calls at $14.50
Sell MSFT Jan (2021) 145 puts at -$15.40
Net per share out-of-pocket cost: -$0.90

I believe Microsoft will win the U.S. government cloud contract. If it does, it will add US$10 billion in revenue and go a long way towards cementing the company’s position as the no. 2 player in the cloud space.

Sell put JPMORGAN (JPM:UN)

Sell JPM Sept (2021) 130 puts at -$11.55
Outcomes:
If stock is above $130 by September 2021 expiration, puts expire worthless.
If stock is below $130 at September 2021 expiration, investor buys stock at $130 less with $11.55 premium received.

This is a bet on a resurgence within the banking sector. The group has been an underperformer in a low-rate environment. But with a robust housing market augmenting loan demand, the fact that JPMorgan is the standard-bearer blue-chip company within the financial services industry, not to mention the financial engineering that continues in the form of hefty stock buybacks, provide upside runway. With this option strategy, the stock needs only to close above $130 by the September 2021 expiration to earn the maximum return.

PAST PICKS: NOV. 9, 2018

Synthetic long APPLE (AAPL:UW)
Buy APPL Jan (2020) 215 calls, Sell APPL Jan (2020) 215 puts.

• Buy AAPL Jan (2020) 215 calls: $24
• Sell AAPL Jan (2020) 215 puts: -$24.60
• Net cost: $0.60
• Equivalent position per 100 shares: $21.44
• Market value: $25.575
• Total return: 19%

ISHARES CHINA LARGE CAP ETF (FXI:UN)

• Then: $39.89
• Now: $41.88
• Return: 5%
• Total return: 7%

Covered Call BOEING (BA:UN)
Buy BA, Sell BA June (2019) 370 calls.

• Then: $369
• Sell BA June (2019) 370 calls: -$31
• Net cost: $338
• Now: $345.19
• Total return: 2%

Total return average: 9%