Five Inflation Fighters Set to Fly – Part 2

This is a continuation of yesterday's post, which laid the background for our inflation premise and discussed F as our first trade idea.  That means we'll need 4 more to round this set off and the chart on the right, from Bespoke, illustrates another premise we've been touting since the Fall – BUY AMERICAN. 

F is American, of course and one of the reasons we like them is that most of their revenues come from domestic auto sales and domestic financing.  As you can see from the chart, there's a pretty strong correlation between NOT relying on Europe and Asia and market performance this year.

This is why we also like domestic Materials plays, like CLF, who do over 68.5% of their business in the US.  Yes, International demand as well as International pricing for iron ore does leave them at the mercy of overall global demand but that's already happened and CLF is already down from $96 in 2011 to $74 last year and $40 at the beginning of this year — all the way to $17.63 at Friday's close, the lowest it's been priced since March of 2009.

We already took a stab at CLF at net $19.90 in our Income Portfolio on 2/26 and added another round (through short put sales) at net $13.50 on 3/27 and, if we can double down again at net $10 – we probably will but for now, and as a new trade idea – I'm very happy with our recent sale of the 2015 $18 puts, which are now $5.25 for a net entry of just $12.75.  As with Ford, this is a margin-efficient sale with a net margin of just $3,551 to collect $5,250 for selling 10 contracts.  Doing nothing else on this trade can return up to 147% on margin in 20 months (Jan 2015) and all CLF has to do is struggle back over $18 – from $17.63 today (2%). 

Figuring out ways to make 147% on 2% stock moves is what options trading is all about!  And what's our worst case here?  We are obligated to own 1,000 shares of CLF at $18 per share ($18,000), less the $5,250 we were paid to accept that obligation so net $12,750, which is 27% below the current price.  Now we can get fancy, let's say we're happy to pay $15…
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