Two exits

We closed out the short trading position that we spoke about last week in CAT. CAT had declined about 4% since then on disappointing earnings.

Today we closed out the pairs trade we wrote about on July 3 (+CHY/-CHI). We entered the trade at a spread of 6.3% and exited today at a spread of 5.09%, the difference represents the profit. To profit on a trade like this, you need the spread to narrow, which is what happened here.

 

seeĀ http://envisionco.net/?p=165

 

Closing out long positions in CAT

We are closing out our long positions in CAT at about $86. We had mentioned CAT as a good long term investment at about $87 on May 5 and we still believe that. But with the China slowdown the stock maybe susceptible to a near to intermediate term decline. Famed short-seller Jim Chanos mentioned as much at the Delivering Alpha conference yesterday. We had a buy/write position, a long position (in a longer term account) and a short position (in a short term trading account). We are closing out the first two positions and holding the short for the time being.

 

KO at $36.5

We looked at KO today. KO reported disappointed earnings yesterday as global growth slowed. KO is a good company for the long run but we would like to see the price drop. Based on historical parameters, we see the stock dropping to around $35 and would begin purchasing at $36.50. Given current information, we are setting a target price of $57.11 in 2017.

Pairs trade with CHY and CHI

We have described in previous posts how to trade pairs. Today, we went short CHI and long CHY. Both are convertible bond closed-end funds run by Calamos. CHY is trading at a discount of about 7.3% and CHI is trading at a discount of about 1.4%. The difference is about 5.9% and the average difference (looking at monthly closes) over the last 2 years and a few months is about 3.3%. We entered our particular trade at a difference of 6.3%. We will aim to close the trade when the gap narrows.

See previous posts on pairs trading:

 

http://envisionco.net/?m=201212

and

http://envisionco.net/?m=201302

Warning: These are not guaranteed profitable trades. Please consult an investment advisory and understand the risks of these trades.