Richard Croft, president, RN Croft Financial Group

Focus: Options & ETFs

MARKET OUTLOOK:

Global equity markets continue to be propped up by Central Bank intervention: more specifically access to free money! The short term challenge is earnings, which is a slow growth economy will remain anemic. Ample evidence of this could be seen in the latest quarterly earnings. While there were a lot of quarterly beats, they came on the back of diminished expectations. Not to mention record stock buyback programs.

Bigger picture, I suspect earnings will remain weak through the remainder of 2016 and perhaps well into 2017. I do not expect equity markets to produce anything beyond mid-single digit returns while bonds are not likely to break even.

The exceptions will be the disrupters. Names like Amazon and Facebook come to mind as companies who are taking market share. In Amazon’s case as consumers continue to move away from box stores to online shopping. For Facebook, social media is taking advertising revenue from search.

Strategies for the remainder of 2016 include gold as an alternative investment although much of the move may already have taken place. And of course covered option writing where the sale of a call option against a long equity position establishes a target price, provides some downside protection and delivers immediate tax advantaged cash flow.

Top Picks:

Orbcomm (ORBC.O)

Orbcomm is a small cap company that manages a number of low earth orbiting satellites providing low cost tracking solutions for the transportation industry. The satellites also feed data to various government agencies like monitoring borders for Homeland Security. Recently the company launched its last 35 satellites via SpaceX. This accounts for the bulk of its near to mid-term capital outlays. As such much of the new business being generated by the company should find its way to the bottom line.

Goldcorp Covered Straddle (G.TO)

Buy: Goldcorp at $24.02 per share

Sell: Goldcorp October 24 calls at $2.80

This is a way to play the gold rally but feel they may be too late. What you can do is take advantage of anomalies in gold stocks. Interestingly, gold stocks tend to be more volatile on the way up which is polar opposite to how volatility impacts other sectors. The covered straddle takes advantage of this because we are selling a call and a put against the underlying stock.

The idea is to buy 100 shares of Goldcorp and sell the October 24 calls at $2.80 and October 24 puts at $2.80 for a net credit of $5.60 per share. If Goldcorp stays the same or rises by the October expiration the call will be exercised and you will have to deliver your 100 shares at $24 per share to the call buyer. The October 24 puts will expire worthless and your six-month total return on invested capital (assuming the investor uses margin to carry the short put) will be 23.3 percent.

If Goldcorp is trading below $24 at the October expiration you will be required to buy another 100 shares at $24 per share. The short calls will expire worthless. The average cost for 200 shares at that point would be $21.22 which is about where the stock was before gold took off.

Square Covered Straddle (SQ.N)

Buy: Square at US$10.00

Sell: Square September 10 calls at US$1.35

Square is a payment transaction company that also provides short term loans (Square Capital) to small businesses that use their payment systems. Jack Dorsey is the CEO (also the CEO of Twitter) took Square public earlier this year. The company’s first quarterly earnings report took place last Thursday after market hours. It was a miss and the share price tanked. However, the loss included a US$50 million charge to settle a lawsuit that claimed some of the code used to develop the payment systems was protected under copyright.

The covered straddle takes advantage of the spike in volatility that accompanied last weeks’ sell-off. If Square is above US$10 per share at the September expiration the calls will be exercised and you will be obligated to deliver the shares to the call buyer at US$10 per share. The four month return in this scenario is 32 percent.

If Square is below US$10 at the September expiration you will be obligated to buy an additional block of stocks. In this scenario you will own twice as many shares at an average cost of US$8.40.

Covered Call on CN Rail

• Then: $77.11
• Now: $77.52
• TR: +0.53%

Covered Call on S&P 500 Depositary Receipts (ETF)
 

• Then: $208.52
• Now: $208.21
• TR: -1.34%

Covered Call on Facebook
 

• Then: $89.16
• Now: $120.18
• TR: +34.80%

Total Return Average: +11.33%

Fund Profile

CPC Option Writing Share Class

Performance as of April 30, 2016

1 month: Fund 0.62%, Index* 2.45%

* Index: TMX Covered Call writers Index

* Index:

* Identify if your fund’s returns are based on reinvested dividends. Returns provided must be net of fees!

Top Holdings:

• Enbridge Income Fund – 5.27%
• RioCan Real Estate Investment Trust – 5.05%
• Royal Bank – 4.94%
• TD Bank – 4.14%
• Apple Inc. - 3.55%

Website: www.croftgroup.com