TTI’s Options Strategy – Results Thus Far In 2017

2017 has been kind to me thus far. Both my large positions in my recent investing ideas came out tops and their share prices exploded significantly.

Dutech Holdings is up about 85% since I bought it a year+ ago. I wrote about the company in June 2016, and  most recently updated my thoughts in a comprehensive series.

Dutech Holdings Investing Thesis

Dutech Holdings – What’s Next? Realize $117k Profit, Hold Or Add More? (Part I)

Massive FY16Q4 For Dutech Holdings – Digging Deep To Understand The Impact Of Metric Group Acquisition (Part II)

Dutech Holdings – What Lies Ahead? Part III

Dutech Holdings Part I’s title is no longer relevant. Cos the profit is no longer $117k with the run up. It’s more like $180k as I type this. Yet, I haven’t sold a single share.

Geo Energy Resources also performed spectacularly well, and is up a massive 75% since I bought it just 3 months ago

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

Right now, I’m eagerly awaiting the upcoming earnings season to kick in (sometime this or next week), then it’s going to get real busy as I dive in to digest each result. I feel like a parent waiting for my kids’ PSLE results. These “kids” of mine are genuises. The rest of the market just hasn’t realized it yet. But they will come around eventually. Starting with PSLE.


446) option-1010899__340.jpg

I’ve also had a series of nice wins in my options strategies. I’ve utilized an option strategy for the US and other larger markets for the past 3 years or so now.

It’s been a long journey, but I’ve since developed my personal brand of strategy which has thus far (*touch wood) been working like a gem, generating consistent cashflow of between $3k-$8k USD every month for me, while putting $200k USD of capital to work.

When I started utilizing options, for a couple of months I had a series of nice wins. It encouraged me to commit more capital, and I got bolder and bolder, choosing contracts with high volatility and their accompanying large premiums, until 1 big fine day, 3 months into utilizing options, the markets turned against me and I pretty much lost ALL the gains I made… in a single night. (All thanks to Herbalife!)

Ouch.

That was extremely painful. I’m not used to a realized 5-digit USD loss in a SINGLE night.

Needless to say, I dived deep into analyzing my strategy and developing over the past 3 years, and now I’ve a certain brand of options strategy that is probably not commonly used, but is probably not unique to myself either. Anyhow, it works for me, and that’s all that matters.

I have previously mentioned about options in a simple guide, so if you’ve no idea what I just said, here it is:

TTI’s Basic Guide To Stock Options


Honestly, I’m not sure why very few people (to the best of my knowledge at least) utilize some form of option strategy. I guess people fear what they don’t know or understand.

But, IMO it’s really not that difficult to understand, although the specific nuances of it would probably need some experience too grasp, yet the rewards can be disproportionately large.

Best of all, I like the time decay portion. When WB bought Gillette, he said he likes to think that as America slept, there would be millions of guys waking up the next day with a bit more facial hair, needing Gillette’s products.

Well, that’s what I feel about options too. As I sleep, the liabilities (ideally) gets reduced by time decay, while I pocket the nice fat premiums and am free to re-invest the premiums.

I know that I’m not the only guy doing this, because in some of the Straits Times news feature on some investors, they mentioned something similar. There are some very wealthy individuals whom I know do something similar to what I’m doing too.

Sure, our strategies will probably differ a bit, but just from the simple few sentences they mentioned, I can tell we’re all probably on the same page somewhat.

Some of my friends have asked me to teach them in a cursory manner, and while I’ve attempted to, they don’t seem to really understand or dare to try.

I guess it’s not hard to see why. Options are derivatives with possibilities of leverage. And leverage, is akin to a bad word for many investors. It’s scary. Sure. There are horror stories everywhere when it comes to leverage.

Which is why, in my thinking, it’s all about managing risk. In fact, I had to seek advice and read some books on statistics recommended by my friend, who is an actuary. She also kindly explained to me what goes on behind the scenes when insurance companies come up with policies and how they determine their premiums. All very interesting to me.

Because, in a nutshell, my option strategy, means I’m essentially the insurance company selling insurance to anyone in the world who wants it.

In fact, my option strategy is even better. Because I can even choose to pass on the liability for the “insurance contract” to someone else, if there’s a likelihood of a claim on the insurance. Insurance companies can’t.

Of course, once in a while, stuff happens and as an “insurance company”, you’ve to start paying out. But the premiums you receive are supposed to far outweigh the payouts in the long run.

It’s all really just about stats and managing risk.


445) TTI's options.jpg

I track my options in a table that looks like this.

The “unshaded” rows are contracts that are still active, while the “shaded” ones are inactive/expired.

The coloured codes are for contracts that are related, i.e. selling and covering the same contract.

In Jan 2017, I collected a total premium of $6,819.54 USD

Amongst all the contracts, I’ve only had to cover 1 that was unprofitable. That’s the pink one for Valeant, in which I lost $43.10 USD. The rest were all highly profitable, with many contracts with high premiums totally expiring, which is kinda like an insurance policy that expired without a claim on it: the insurance company pockets the premium and kindly asks if you’d like to extend your coverage.

I’ve had 3 options assigned, resulting in a net purchase of 9,000 shares of Chesapeake Energy, and 400 shares of Valeant Pharmaceuticals.

The 9,000 shares of Chesapeake Energy though, are shares that I’ve held, and previously sold in another option contract that got exercised in Dec 2016. So I’m just sorta buying back what I’ve been contracted to sell previously.

All this while collecting premiums on both the buy and sell contracts. Fine piece of business I’d say.

The 400 shares of Valeant is a new addition to my existing position. I wasn’t contracted to sell previously. But I already have the intention to add to my Valeant position (this is recorded in the “Transactions” page) anyway, so getting this exercised is fine with me, plus I get to pocket the premium and I’ve swung to sell a Call Option on this (As shown in the table) (On a related note, I’m still getting whacked on my Valeant position, but I’m a damn stubborn guy and I still think I’m going to come out tops. We’ll see.)

You might also notice that practically all my options activities revolve around just these 2 companies.

This is because I believe that for it to be done safely, options still require the usual deep value analysis, and thorough investigation; no different from what I’d do before I’d buy the equity of the company.

Afterall, options ARE derivatives. And their intrinsic value is derived from the equity.


On a different, yet related note… (and I’m trying to illustrate something here with a real life example, not trying to identify anyone)

Around the time when my Dutech Holdings Part I thesis was posted, the share price then was around $0.45. Someone told me that I’d better sell cos the “trend is very bearish”. I very politely begged to differ. He ended with an ominous “All the best then”. (He meant it genuinely, I believe)

Now, I’d be an abject failure if my months of research into the company can’t provide me with the confidence or arrogance to dismiss naysayers. Particularly those who rely solely on the stars and godly celestial beings in the form of squiggly lines to tell them their fortune.

When the share price rose to $0.48 or thereabouts, the same guy screamed “its always wise to lock in profits when you can!”

When the share price rose yet further to $0.50, there’s a sudden change. Suddenly, he’s telling me “looks like it’d breakout! watch for it! If it does breakout, it may go higher!”

Wow. Seriously wow. That’s like a sentence only Donald Trump makes. Lots of words with absolutely zero meaning. Maybe I can come up with some of these myself:

“If it doesn’t breakout, it may go lower! But there’s also a chance it can stay flat here to provide some support! Be careful if it goes past this support though, because there’s a likelihood of it going much lower!”

Anyway, to conclude the story, finally, at $0.535 (today), he’s saying “Very bullish! This is going to go higher and higher! Likely to make new highs! Target Price: $0.XX <–“XX” is some new crazy large number that I think the gods told him.

The net effect of all this, is that NOW I’m starting to getting cautious about my Dutech position if even the gods think it’s going straight up to heaven…

The above is a true story. As ridiculous as it sounds. I edited the comments so that it’s not exactly the same, cos I don’t want to identify the individual.

In his defence, even the pros make such statements.

There’s a long statement by El-Erian some months ago about his outlook on the economy. And it’s so long it took up like 4 lines of the Bloomberg article, and basically it says “the economy can go up from here, but I won’t be surprised if it goes down either. There’s a small chance it can also flatline and trend, which investors would be wise not to discount…. blahblahblah.”

Well, not exactly like this, but similar. I tried finding the article to substantiate but it’s some time ago and I can’t pinpoint the exact title so can’t find it. But I remember sending that to some friends and we totally had a good laugh at it.

Imagine if doctors can act like that:

“There’s a chance that this radio-opaque lesion is cancer. We have to monitor it closely, but don’t be too worried because it may not even be cancerous either. It can grow and spread quickly, although I won’t be surprised if it stays the same when we take a review x-ray in future. We gotta remain vigilant though, and not forget that there’s always the likelihood of metastasis with this being fatal eventually, although at this stage this likelihood is not high.”

So when you’re on your deathbed, the doctor can tell you “I told you it can grow and spread quickly right? I told you there’s a chance it can get fatal right?”

How reassuring.

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26 comments

  1. Thanks for the enlightening post. Would you be able to share more of your selling of puts and calls options ? e.g. how long is expiry?, how far the std dev?, what stocks you look for etc.

    Like

    1. Hi Mike
      It depends on the situation.
      But in all situations, it has to be grounded in a value analysis.
      For eg. if I have no positions but want to build a position in a company, then I’d sell put options at strike prices at or below what I think is the intrinsic value. If the share price is close enough to this value, the premiums can be quite high. In which case, I’d prefer to set the expiry date further out (2 weeks – 1mth away) to capitalize on the time premium.
      If it’s a situation where I think I want to build up a position, but the upcoming earnings release is going to be favorable, then I’d sell puts with expiry before the ER, and at strike prices close to the current price, or even ITM options.

      The other scenario is for existing holdings. I’d have a position sizing in mind relative to the portfolio. There can be some changes to this sizing (it is arbitrary afterall), so I’d sell put options and if they get exercised, I’d swing to selling call options. So in this instance, the best scenarios are when the share prices goes up and downs and hovers around for a while so you can continously sell put and call options. Generally the expiry in these scenarios are between 2-3 weeks. The exact expiry depends on the offer I get.
      In most contracts, the upcoming expiry date (1 week) gives the most premium RELATIVE to the time frame. i.e. 2 weeks premium is slightly < 2 x 1 week premium
      3 weeks premium is << 3 x 1 week premium etc.
      So as you extend it out, it'd come to a point where it's not worth it to sell options that's too far out. In short, the time decay DOESN'T START until it gets nearer the expiry date. And in the meantime, you're exposed to fluctuations in the share price.
      Also, as a broad guideline, I only look to sell put options on days when the underlying stock is dropping, and sell call options on days when the underlying stock is rising. In my experience, that naturally gives a MOS.
      There are some other stuff that I do that's prob too hard to describe by typing here. In my previous post on options, I went into the detail to explain how I noticed that the best premiums, are NOT when the prices has dropped to the lowest.
      They're usually when the prices ARE DROPPING.
      Aside from all this, in options, the position sizing and risk management is really really important.
      So i already have existing positions which IMO have a certain likelihood of being exercised, the remaining option activity will revolve around "unlikely to get exercised" options. So I'd accept lower premiums, shorter expiry, lower implied volatility in return for a high likelihood of expiry.
      TTI

      Liked by 2 people

  2. Hi TTI,
    WOW !! Super profit on Dutech and next Geo Energy will be the next :-)
    Also, thanks for sharing the trading strategy of ” Option “… seems it work well for you !!
    Cheers !!

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    1. Yr option strategy is similar to mine. I sell call options on stocks I have and have gone up. I also sell put options on stocks I am happier to buy. Do u do that for hk stocks?

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      1. Hi Gary,
        I used to do it for ICBC (only the HK listed ones, not the SH), but not anymore. That’s cos I wanted a position in ICBC then anyway. At that time, there was a lot of talk about China’s banks blowing up because of the bad debts etc. “Shadow banking” was the term floated around admist the fear.
        I could get ICBC at a very good price whilst pocketing high premiums.
        Now, all my option activity revolves around the US. Simply because:
        1) of the 2 US companies that I hold.
        2) Interest rates was at all time low (already 0%) at that time. I figured USD-SGD could only go up. Or at the very worst, just flatline.
        So an option strategy in US markets would give me a tailwind, or at the very least, no wind! but no headwind.

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          1. No.
            Some of my positions got “in built” hedges, and that means that as a whole, FX changes wouldn’t be too big a factor.
            For eg. When USD strengthens against SGD:
            that’s good for Dutech Holdings cos their sales are in USD but reporting in SGD
            it’s a slight positive for Geo Energy because sales are in USD, but their gathering and transport costs are in USD as well. Overall it’s a net positive though.
            It’s a positive for Boustead as well, as their contracts are mostly in USD while reporting currency is in SGD
            For my US positions, obviously it’s a positive tailwind because my portfolio reporting currency is in SGD

            If USD weakens against SGD,
            it is a positive (for now) for LTC Corporation, because they replenish their steel inventory, which is in USD whereas most of their currency holdings are in SGD now. Their sale prices is fixed by BCA, and I dunno how BCA calculates the price index, but I notice it lags the movements of US steel price index by quite a lot.
            In the short term, particularly if you are talking about options, a weaker USD also helps to boost asset prices, so that’s a minor consideration for your options positions, if expiry dates are within a week or a few weeks.

            So in short, if USD strengthens against SGD, it’d be a net positive for me. That’s planned as part of my portfolio.
            If USD weakens, it’s no biggie either. I don’t think it makes too much of a difference.
            So I don’t hedge currency per say, but I think there’s a natural hedge in some of the businesses.
            I do trade a bit around the USD-SGD pair though. Nothing too significant.
            In $35K USD blocks. When the rate swings, I sell and buy accordingly.
            As it stands currently, my net USD-SGD rate is 1.37012. (cumulative effects of realized FX gains/losses)
            Which is below the 1.41560 currently, so I’m up in terms of Fx.

            Like

  3. Hi Thumb Tack,

    Great article, as usual! Side track a bit – your previous posts on Dutech inspired me to look into it, and I’m vested now. Thanks for sharing the idea and your insights!

    Here’s my analysis on Dutech. Happy to discuss any comments or questions that you have.
    https://drive.google.com/open?id=0B3tyfOVNvWa3OG5DTWdzd2RobDQ

    Anyway I have some questions on the profitability and sustainability of using an options strategy (selling options) vs a buy-and-hold strategy. My concern is if I think a company is a rare gem and a wonderful business, I can’t bear to see myself not picking it up (when my sold put does not get exercised, just because I have my eyes on a few-percentage-points short term gain, and then the stock price has since rosen by a lot) or losing it (when my sold call gets exercised, again, in return for a few % point short term gains), when I see potential large or even multi-bagger returns for that stock in the long run. And I think undervalued, or even most, stocks tend to have abrupt large share price rises in a few days (be it for catalysts, analyst rerating or god knows whatever reason), and if one uses an option strategy, he/she may miss out those returns if he/she happens to be not holding on to the underlying stock during those few days. I’m a buy-and-hold value investor now, but am open to options too if it is sustainable and provides sort of predictable returns range (but so far I haven’t been able to find reasons to convince myself to do so). So I would appreciate much your views on this! :)

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    1. For me, selling call only makes sense if the stock price has gone up by a fair bit. You can either sell out of the money call (i,e exercise price higher than current) or short duration call option so the chance to get exercise is low.
      If all else fails, u can also buy back the call losing money but still holding onto the stock. The consolation is that the stock is at a higher price and guess what u can sell call option at an even higher price!

      For selling put, it is just a way to buy at a cheaper price. Think of a limit order but u get some premium in return. It is also not an all or nothing strategy as u can spend x to sell put option (some brokerage requires u to deposit cash (cash secured put) and spend the rest to buy at market price or put limit order)

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    2. Hi Nomad Investor
      Ah, great question on the buy and hold part.
      You’re absolutely right about the missing out on a large gain and instead, getting some premium only. But buy and hold and selling a call option are not mutually exclusive. In my reply above to Mike I’ve also explained the various scenarios that I’ll utilize. For eg. if you think the results in the near term (and by extension the share price) would not rise that quickly, you can sell call options nearer the strike price. If you think the share price will rise, you can either not enter into any option contract, sell options that have expiry dates that are FAR out (further out, premiums higher OR you can increase the strike price yet some more to meet your TP etc), or you can sell options with expiry dates that are much much nearer than the ER date so that they’d expire much earlier. Stuff like that.
      But essentially, you’re right. When you sell a call option, you risking the “missing out” of a positive event.
      Obviously all this needs a certain awareness of roughly what’s going to happen to the company in the near term. Which is why I’ve mentioned repeatedly actually, that ultimately a deep value analysis is needed.
      The good news is, one doesn’t need to know exactly what’s going to happen.
      You just need to be approximately correct.
      Just based on simple stats, I think something like 80-90% of all option contracts are NOT exercised. (No substantiation here, can’t remember where I read this), so any strategy based on such a high success rate, is surely grounds for consideration.

      Thanks for your writeup on Dutech, I’ll study it later. And congrats on your position too.

      Regards
      TTI

      Like

      1. Hi TTI,

        Thanks much for your reply! It’s good to hear your views on this. And yeah I read your explanations on the various scenarios and they are very helpful in helping me further understand how to execute the options strategy more effectively and profitably.

        I like the depth of your analysis and I am improving on this area as I go. And yes I read before somewhere about the high probability of options expiring so you are right. I will stick to buy-and-hold now and keep my mind open to options strategy.

        My analysis of Dutech is much lighter in comparison with yours, but I hope it would make a light and fun read for you. What’s interesting is that although we use very different valuation method, I arrive at similar intrinsic value range as yours (I only found out your estimate of intrinsic value after I finished my analysis and I never bother to look at CIMB’s).

        Cheers,
        Nomad Investor

        Like

  4. Tremendously enjoyed this post and your witty turnaround at the end! Haha. I’m still trying to wrap my head around your options strategy that we discussed. Will need to chat more once I’ve gotten a better grip on understanding it proper!

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    1. Which 2? Are you referring to my US equities Chesapeake Energy and Valeant Pharmaceuticals?
      I didn’t write up an investing thesis on them as, well, SG TTI is focused mainly on SG equities and I don’t think there’s much interest on foreign listed companies.
      In short:
      CHK is a long term play. They are the largest, and by far the most efficient natural gas drillers in US, and CEO Lawler is a fantastic CEO. Just his maneuvers in the debt market last year eliminated most of the near term debt overhang for CHK. It’s also a play on the energy markets, which is obviously depressed right now. Although CHK is known to be a NG company, a substantial part of their revenue comes from liquid oils and oil equivalents, so it is pretty much a barometer of energy in general. Since Lawler came in, (the previous CEO whom I shall not condemn now because he’s dead, was a disaster basically), he’s got a lot of stuff done. The company is getting more and more efficient, drilling longer and longer laterals, cutting production costs. Their NG derived has dropped a lot less than the shut down of wells, indicating each of their site is producing more. The company is profitable at current NG prices, despite it being depressed. They were STILL showing losses because of legacy issues i.e. excessive debt and interests, lawsuits from the McClendon era.
      The key risks for CHK are mainly policy related. Macro issues. But if there will eventually be a major player for the NG markets in US, CHK will be it.

      VRX is a turnaround play. I am probably about 1.5years too early in entering. The extreme drop in sentiment caught me by surprise. It is so cheap now, it’s disgusting. The PE is around 3.5 times! Most of it’s peers is well into the teens.
      The reasons for it being cheap are: Earnings are non-GAAP, debt of $30bil+ (market cap is now around $5bil), and legacy issues like lawsuits and gov intervention in the drug markets. (drug pricing being a political issue)
      My simple bet is on the assets being far worth more than what the markets gauge them to be. On top of that, the company is incredible FCF generative. $2bil in FCF previously, with some divestments, and some loss of exclusivity for certain key drugs has brought it down, but it’d still be around $1.5bil of FCF annually.
      Plus the company has divested some non-core drugs (and 1 core one) and that’ll pay down debt further.
      I think the sentiment will turn VERY SOON.
      Specifically…next week when VRX releases FY16Q4 results and gives guidance for FY17.
      I think VRX is one of the hardest companies to evaluate. The hardest that I’ve done thus far, and I’m supposedly in a related field. The markets are reading the news headlines, and it’s all bad thus far. I’d prefer to have started building a position right about now, cos I think the lows are just in. But I was 1.5 years or so too early, wasn’t expecting that exaggerated a reaction. Nobody seems to respect FCF anymore when the headline news are bad!
      I have good company though. Bill Miller agrees with me. :)

      Like

        1. Hi Weihan
          I think you meant CHK instead of CHP.
          If it happens, I guess it depends on the circumstances then, and whether new data emerges. As it stands currently, yes, I would continue to hold and sell options on those positions.
          I don’t think I’m likely to add though, for position sizing reasons.
          To begin with, CHK was meant to be a multi year, long term position, so I’m not worried. Thus far, they are executing and it’s the environment (which nobody can predict) that’s been a drag on the whole industry.
          For VRX, tbh the negativity caught me by surprise. Unlike what the markets think, the recent ER actually gave me more confidence. The company is still on track to turnaround, but it would take time. You can’t change the path of an ocean liner in an instance. As long as they can maintain their FCF generation, that would chip away at their debt quarter after quarter. Despite all the negativity, if you ignore all the news and opinions out there and just look at their debt profile, it has improved significantly compared to 2 years ago.

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