Daily Archives: May 1, 2018

Options

Make 220% on This Popular Volatility Fund

Market volatility is like a zombie.  You keep thinking its dead, but it keeps coming back to life and shambling onward.  It’s been about 10 weeks since the February 5th selloff but high market volatility refuses to die.

As you can see from the chart below, the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) has basically been unable to stay below $40 for more than a day or two.  Keep in mind, prior to the February correction, VXX was mostly sitting well below $30.

VXX has become the go to method for trading short-term volatility.  It was always popular, but with XIV gone (the inverse of VXX), it’s easily the most active ETP (exchange traded product) for volatility.  VXX trades over 40 million shares a day on average, and has close to $900 million in assets.

So what is keeping volatility from returning to its normally low levels?

We actually have a confluence of events which are contributing to higher than usual volatility levels.  These include political concerns (Mueller, tariffs), economic concerns (higher interest rates, tariffs), and financial worries (poor earnings).

Related: This Former Hot IPO Stock Could Be Ready To Move

On their own, none of these concerns would merit a major reaction from the investment crowd.  However, all these event together are ramping up concern over the expansion of the current bull market.

Nevertheless, some options traders (with lots of capital) aren’t convinced volatility is going to remain elevated.  In fact, there are sizeable options bets that VXX is going to be at around this level or lower both in the short-term and medium-term.

One trader elected to sell over 11,500 May 25th VXX 53 calls with the stock at $43.  The trader collected $1.46 in premium per call, which amounted to over $1.7 million in premiums.  Breakeven is about $54.50, but anything under $53 on May 25th will result in the full premiums being collected.

Another (or possibly the same trader) made a similar trade except for in June instead of May.  This trader sold over 11,000 June 15th VXX 55 calls with the stock at $44.50.  The premium collected in this case was $2.32 per contract or $2.6 million in premiums total.  For this trade, breakeven occurs at around $57.50.

I feel both trades are likely to be successful.  Even if VXX spikes above $50, it isn’t likely to stay there for long.  Still, I would never recommend being short naked calls for any trader, as the risk is virtually unlimited.

Once again, I prefer to use put spreads when taking a short position on VXX.  For example, the May 25th 36-40 put spread (buying the 40 put, selling the 36 put) costs about $1.25 with the stock at $44.  For a month long trade, you’d only spend $125 per spread with the breakeven at $38.25 upon expiration.

Even better, your max gain potential is $2.75 or $275 per spread.  Since max loss is only $1.25, that means you can earn a 220% return on this trade.  That’s clearly a very juicy return possibility, and your downside is capped.  It’s the best of both worlds if you believe VXX is going lower over the next month.

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Source: Investors Alley

REITS

The Future is Data, and These 3 REITs are the Way to Play that Future

The need for an ever-increasing amount of data storage is a growth story that appears to have a very long runway. Experts estimate that the “digital universe” will double every two years (that’s a 50-fold increase in a decade). Enterprise IT, cloud computing and services, and the Internet of Things all require larger and larger amounts of data storage capacity. Data center owning real estate investment trusts (REITs) are a conservative way to play this trend, with potential for high teens, up to 20% annual total returns.

Related: 3 Cloud Computing Companies Racing to Push Cloud Computing Aside

There is a small handful of REITs that specialize in developing and leasing data centers. All of these companies are in a growth mode and are either acquiring and/or developing new facilities to lease out to a wide range of customers. The investing public often forgets that this REIT sector is an integral part of the technology industry. Often, they are treated like any other class of REIT. This dichotomy of market focus allows the smart investor to pick up data center REIT shares when the REIT sector at large goes into a decline. Multi-year investment returns from the data center companies will be driven by cash flow and dividend growth rates.

Let’s take a look at three REITs that can put high-teens annual compounding total returns into your portfolio.

Equinix, Inc. (Nasdaq: EQIX) is the $32 billion market cap, 800 lb. gorilla of the data center industry. The company converted from corporate tax payer to REIT status at the start of 2015. The company is a colocation and interconnection service provider. Colocation is a data center facility in which a business can rent space for servers and other computing hardware. Typically, a colocation facility provides the building, cooling, power, bandwidth and physical security while the customer provides servers and storage.

The company’s services currently give 9,800 customers 280,000 interconnects between data centers and world’s digital exchanges. According to the current Investor Overview presentation, Equinix owns 190 data centers in 24 countries, on five continents.

This is truly an international company. Over the last decade the company has produced 26% and 29% compounding annual revenue and EBITDA growth. This results in mid-teen per share cash flow growth. For 2018 the company forecasts 14% FFO per share and dividend increases. The shares currently yield 2.2%.

Digital Realty Trust, Inc. (NYSE: DLR) is a $20 billion market cap REIT that owns 205 data centers in 12 countries. Digital Realty has 2,300 customers. Digital Realty is also a colocation and interconnection services provider.

This REIT’s customer list includes some of the largest technology and telecommunications companies. In the top 10 are IBM, Oracle, Verizon, Linked In, and even Equinix.

According to the current investor presentation, Digital Realty has grown FFO per share for 12 straight years. Over that period cash flow to pay dividends has grown by a compounding 12.3% per year. This chart shows the FFO growth compared to large REITs in other sectors:

The DLR dividend has grown by 10% plus per year for the last decade. Management forecasts a 9% increase in 2018. The shares currently yield 4.0%.

CoreSite Realty Corp (NYSE: COR) is a $3.6 billion market cap REIT that owns 20 data centers in eight strategic U.S. cities. The company’s focus is to provide colocation services to enterprise, network, and cloud services companies. Here is a graphic of the larger (out of 1200) customers:

CoreSite is the high growth, higher risk company out of the three covered here. Since 2011, FFO per share has grown by 23% compounded and the dividend by more than 30% per year. Future results will cycle from relatively flat to high growth years.

An investment in COR will not be as stable as with the large cap data center REITs. The flip side is the potential for large dividend increases and corresponding share price gains. The shares currently yield 3.7%.

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Source: Investors Alley