Wow. In My 4 Years Of Experience In Options… This Is A First.

I wasn’t intending on a post so quickly after the previous one. But this is quite crazy.

Some recent positions have done really well, really quickly.

I’ve written, in real time, about each of these positions in InvestingNote.

First, I bought some shares in Singtel at $3.12, trading it a mere 2 days later at $3.25, which is pretty good. I don’t really wanna write too much about this cos lotsa guys own Singtel, and it hasn’t been very rewarding.

Many tortured souls out there, don’t want them coming up to me with pitch forks.

Next, I built a small position in Falcon Energy, betting that they’d manage to restructure their debt successfully. They’re still not out of the woods yet, but at least they managed to increase their liquidity with a $23mil injection from the partial sale of CH Offshore. Anyway, I’d just cut and paste my response to someone who asked me for my thoughts on Falcon Energy:

No plans to do a write up on FE cos it’s a small position and I’m gg on holidays next month… 
Maybe let me just share here briefly then: 
As of mrq, FE had current debts payable of $132mil (all figures are rough and taken off the back of my head, so may be slightly inaccurate. Typing on mobile here) 
and cash on hand of something like $12mil I think. Even their total current assets is something like just under $120mil. 
In other words, they are pretty much insolvent, and can only remain viable under 2 scenarios: 
1) Lenders restructure debt, either by taking a haircut or by dragging out payment period 
2) They get a white knight capital infusion 
Failing which, the only other alternative is BK. 
So the scenario then is binary in nature: Either insolvent and BK or survive in 1 form or other. 
And we know that the lenders are not going to sit ard and do nothing, so there’s pressure for something to materialize. We just don’t know if it’s going to be BK or survival. 
The key though, is that at that point, when the share price was under $0.03, the markets are pricing in near certain bankruptcy. Their NTA was ard 13 US cents, and the markets were assigning a value of 3 SG cents to them. 
My entry price is an average of $0.033 simply cos I made a stupid mistake when keying in my orders and ended up selling instead of buying, and had to buyback in the end and incurred more costs, including a penalty fee for buying in. So that jacked up my average price substantially. Otherwise, it’d have been below 0.03 
(https://www.investingnote.com/posts/893150)

Since the outcome is binary, how’d I end up on the side of them surviving? 
1) Oil prices were recovering. I’m not saying this helps from a fundamental aspect. that is, I don’t think the oil price recovery = more revenue for FE = able to survive. 
Nope. Not at all. These things take time to filter down. And to begin with, many of their contracts would’ve locked in the prices. So saying oil price going up = they will do well is too broad and useless. BUT when the basic industry’s commodity is improving, the 3 banks and lenders are likely to be more willing to restructure. 
In my experience, banks are unlikely to force a BK cos its a messy process, and even if their debt is secured, after taking into account the legal processes and such, they’d either still get a haircut and likely see their monies after a prolonged duration. They will be likely to restructure a dragged out repayment process instead. The only reason to NOT do this, is if the borrower is very unlikely to be able to pay up even X months or years down the road, and/or requires more capital infusions. It is for this reason, that the optics of an improving industry is very important for getting some leeway from the lenders. 
2) If we zoom into the BS of the company, they are facing insolvency now because of the large debt due currently. 
Yet the non current liabilities is quite manageable, aka there is little long term debt. This suggests that if the lenders are able to drag out the payment periods, the company’s current debt profile will immediately improve. If I can see that, the parties involved can too. Forcing FE to pay up right now and risk forcing them to go into BK, VS dragging out payment periods or delaying collection WITHOUT any further capital infusions, and eventually being able to collect in full without any haircut…. 
which would you do if you were the lender? 
3) The wide gap between NAV and the price! Even in the event of liquidation… 3 SG cents vs 13 US cents? 
Even if we write off 50% of the asset values carried in the books… there’s still a wide MOS there 
4) Whilst the company keeps reporting losses……. the key number that the lenders will zoom into is the CFO. And cashflows from operations is positive in the mrq (Can’t rem exactly how much) 
5) FF Wong made a personal investment of $2mil. From my previous experience with Boustead, I know how this guy invests. He’s extremely conservative, and if he’s putting money in, it’s cos the situation is derisked. For god’s sake, this guy gave up 3 opportunities to deploy Boustead’s cash when they are in advanced negotiations, each time because he identified some risk. He’s very careful with money. 
6) Despite all these points, my position size in this is very small. Just 200,000. I won’t lose sleep regardless of how the situation pans out, yet % returns wise, it’s pretty attractive as I get a what… 40%? ROI within a month or so. (based on current figures at least)

Then, I built a position in APAC Realty, buying up 40,000 shares at $0.6, on the back of the ABSD news and the massive drop. The logic is simple. The headline news created a lot of fear and APAC fell something like 25% or so in a single day. That’s when I started buying.

I still haven’t decided if I’m going to take profit at the current $0.66 price or so… 10% return in a week+ is rather attractive. Or perhaps I’d just wait another 1-2 weeks for their Q2 earning results. Will ponder about this over the weekend.

Then of course, there’s my new squeeze – Broadcom, who has done really well, really quickly.

BUT THIS. This is a first for me.

I’ve a bunch of Chesapeake Energy options expiring tonight. Some time ago, having sold CHK $5 puts, I was expecting them to be assigned tonight, as the share price was something like $4.4.

That’s fine with me, since I’m prepared to add to my CHK positions < $5. (Lesser after accounting for the premiums)

As the share price was so far away from the $5 exercise price, I’d pretty much taken for granted that they will certainly end tonight below $5, and I’d have to pay up to buy the shares at $5.

Apparently… my counter party thought so too.

Cos… they ended up assigning the options 1 day early, at 1am this morning:

Well, they (and myself too) were not banking on THIS to happen right after assigning the shares to me:

https://www.channelnewsasia.com/news/business/chesapeake-energy-plans-to-sell-utica-shale-stake-for-us-2-billion-10566690

Wow. Talk about timing!

With this piece of news, the share price pre-market, is going ballistic, and is up 13% suddenly!

And of course. The $2bil will cut CHK’s debt substantially, and delever the company. And it’s not just the actual debt cutting. It’s the lowered interest expenses that suddenly puts the company on a much stronger footing. My investing thesis has always been that the assets are mostly untapped, yet there will be parties willing to pay for these shale assets. It took a long time coming, and I certainly wasn’t expecting a complete sale of the utica shale assets.

Man. I’m pretty sure the counter party totally regrets exercising those options.

Since I’ve picked the shares up early, I’m free to swing to the other side of the fence and sell calls on these positions.

I’ve a feeling this is going to be a great weekend.

TTI: “I’m Sorry, It’s All Over Between Us. I’m Breaking Up With You”

Dear Disney,

I’m sorry it has to end, but it’s all over between us. I’m breaking up with you. 

I know, I know, we only really just got together barely a month plus ago (FY18Q2 -“Fun Isn’t Something One Considers When Balancing TTI’s Portfolio. But This…(heh heh heh heh) Does Put A Smile On My Face.”)

Look, I’m not a player. I really thought we were going to last… I mean, we really connected the past month, didn’t we? We had really really good times together and I really planned on holding on to you. Some nights… oh my. Sitting in front of the laptop, you and me, against the world….

I felt I truly understood everything about you, your past history and all your future dreams and plans. It took some time, you aren’t exactly an easy girl to understand, but it was all worth it.

The thing is… you got into a bidding war with Comcast for Fox, and I just didn’t like it. You know that, right? I know it’s not your fault. You had to. Comcast was the one who forced your hand, but the facts remain that you spent $71 bil for Fox, when we initially agreed to bid only $52 bil. To be fair, I thought you’d be spending more than that.

But you know how I feel about bidding wars. Yes, I understand that Fox is going to be your crown jewel handbag. It’d fit in very nicely with your other accessories, and I’m pretty sure eventually, you’d find a way to integrate it into your outfit. I honestly, really do think, you’d be a real stunner with Fox. You’re going to be so hot, I’m sure you’re going to rival Netflix eventually. I hear she’s nervously looking over her shoulders at you. (https://www.mediaplaynews.com/could-disney-make-hulu-a-netflix-killer/)

But there’d be fitting pains. You’d need some time to figure out how best to pair Fox handbag with your other franchise accessories.

TBH, I think Comcast was just being a jerk. She knew from the start that she ain’t going to win this auction. What Disney wants, Disney gets right? The additional bid thrown in, was just to screw you up and make you pay a bit higher…… just so that you run out of ammunition to compete on the next bidding war for Sky.(https://www.wsj.com/articles/comcast-drops-bid-for-fox-assets-will-pursue-sky-1532004447) 

Anyway, both of you hate each other to the core. Everybody knows that. So it’s really not too surprising.

(https://money.cnn.com/2018/04/26/technology/pacific-newsletter/index.html)

And btw, I think you’re still going to go for Sky too right? If anything, just to screw up Comcast a bit right? Plus I hear that your new Fox acquisition… comes with a little free gift: 39% of Sky. So… you go girl!

(https://www.ft.com/content/5685a058-8b6a-11e8-bf9e-8771d5404543)

OK, I’m not going to insult your intelligence. Truth be told, Disney… It really isn’t you…. It’s me. I have a new squeeze. Her name’s Broadcom.

The thing is, you see, Disney, you got really tall in the past month since we got together:

You literally just grew like 8% in the past month or so.

And you know how I have a thing for short girls. 

My new squeeze, Broadcom, on the other hand, got shorter suddenly:

I just thought that it’s time to move onto greener shorter pastures.

Plus it’s kinda unfair that Broadcom is that short. She ingested a vitamin pill, and suddenly everybody thinks she should be that short. Yet, the pill that she ingested, CA Technologies, isn’t bad. It’s been around for ages, and is as reliable as it gets. (http://www.eweek.com/development/broadcom-looks-to-buy-ca-to-become-larger-it-infrastructure-player)

I actually do think that CA would do Broadcom a world of good, don’t you? Often, after you ingest a pill, it does take some time before it gets into your system and the benefits show up, ain’t that right?

And why do I like short girls? Well, not really actually. I just like my new squeezes to be short.

Cos then, you get a short squeeze. Get it? hahaha!

I’ve even met Broadcom’s dad btw. He’s a really cool guy. Did a fantastic job raising Broadcom, I don’t think there are many dads out there who can do better. Here, check him out:

In any case, I’ve only gotten together with Broadcom barely a week and… she’s treating me very well:

Very well indeed. USD 2.5k kinda well.

So take care Disney. This is one of the happiest break ups I’m involved in.

I’m still looking out for ya ok… In fact, I’m still rolling over some of your put options that I’ve sold. 

I hope 1 day we get back together.

(Maybe we can do a threesome with Broadcom?)

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I’m getting lazy.

I used to compile and present all these theses in nice, detailed, impressive reports, with some of these dragging out to several parts.

Now, I just add that into a break up letter.

Lucky for TTI, I’m not selling any courses or services here, neither do I benefit from clicks, so I can do as my heart desires.

Now… still on my new squeeze Boardcom.

For the uninitiated, a very quick update: Boardcom launched a takeover of CA Technologies for USD 44.50. The markets took a dim view of the takeover as Boardcom was supposed to acquire businesses within its industry with its massive cash hoard and impressive cashflows generated every quarter.

After their announced attempted to buy over Qualcomm got screwed by Trump, the markets were expecting them to go after other similar rivals and acquire them. Instead, Boardcom went to buy something with seemingly no synergy and completely unrelated to Boardcom’s traditional chips businesses.

When the deal was announced, Boardcom’s market cap shrank by almost $19bil…. which is the equivalent of what the takeover of CA Technologies would cost Boardcom.

This didn’t make any sense to me. CA Tech generates just over $1bil in FCF every year, and yet the markets are assigning ZERO value to this acquisition? $19bil of market cap got evaporated? So before the announcement, CA Tech was a standalone, independent listed company. After acquisition, it’s worth…. $0?

Anyhow, I’m digressing here.

Right now, an arbitrage opportunity exists…. of sorts.

U see, the takeover is almost 100% likely to proceed. Both boards of both companies have jointly announced that they are in favor of this acquisition. CA’s largest shareholder, Careal Property Group AG and affiliates, own 25% of CA and they have publicly supported this deal. And at a 20% premium to the last traded price, I’d think most SHs of CA Technologies would be happy enough.

The deal is slated to complete by the end of 2018, and the acquisition price is USD 44.50, fully payable in cold hard cash.

The share price of CA Tech though, is just under USD 44 right now:

Since the deal is highly probable to complete, it means that anyone buying the shares now for USD 44, would receive USD 44.50 within the next 5 months.

That’s a return of 1.14% in 5 months.

That’s an ok return considering the deal has been derisked, all parties involved are supportive and there’s no anti trust concerns (totally different industries!) to scuttle the deal.

But 1.14% in 5 months is hardly impressive.

If one is sharper and pokes around more though, you’d notice that the August $44 puts could’ve been sold for USD 0.45 a piece. This was from just yesterday (Friday):

Here’s the trade history:

There are 19 contracts that transacted at USD 0.43 and gasp, even 4 at USD 0.54. (That’s me! haha)

A total of 41 contracts got transacted at around USD 0.4 – USD 0.54

Does this make any sense to you?

This means that one could sell puts for a premium of USD 0.4 – USD 0.54, and these puts expire in 4 weeks.

This means that one could get the same 1.14% ROI… but this time, in 1 month instead of 5 months!

And if the contracts do get exercised and you end up picking up the shares at USD 44, there’s no biggie either cos then you’d collect the same 1.14% AGAIN, but this time in 4 months instead of 5!

So to summarize… one could either buy a direct equity stake and collect a ROI of 1.14% in 5 months, relatively risk free.

OR…

one could do what I just did, and sell puts with a strike price of USD 44, and collect this 1.14% within 1 month (multiplying your rate of return by 5 times!), and potentially, if they get exercised, you’d collect another 1.14% within 4 months.

In $$$ terms, in the 1st arbitrage, you’d receive USD 50 for every 100 direct shares that you own, by the end of the year. So if you bought say… 4,100 shares, you’d get a profit of USD 2,050 within the next 5 months.

Someone who has sold just 1 of the August puts though, would receive USD 50 within 1 month. And if you had sold all of the 41 contracts, you’d have pocketed USD 2,050 within 1 month. And if they get exercised, you’d own 4,100 shares which would generate another profit of USD 2,050 within 4 months. That’s DOUBLE the ROI of what the 1st arbitrage scenario. And if they don’t get exercised, you’d have the SAME ROI… but within 1 month instead of 5!

This is kinda like…. an arbitrage opportunity within an arbitrage opportunity.

Arbitrage the arbitrage!

And this is a perfect illustration of why I think that there’re so many permutations in the world of options that if one looks hard enough, you’d be able to find mis-pricings.

(I didn’t get to sell all the 41 contracts though, the liquidity was low)

And btw, that’s just for the August contracts, you can sieve through the other months to look for opportunities too. (I did just that but settled on the Aug ones as they are the most time efficient ones)

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I’ve a running joke with my wife that newly weds look forward to their wedding nights and married guys look forward to Friday nights. Well, TTI looks forward to Fri nights too… because of this:

(OK, technically the options expire on Sats, not Fri nights)

There. That’s the nice little report I like to see that sets me up for the weekend. There’re 9 sets of contracts right there that has expired, and each of these would be worth several hundred USD, some more.

Assuming the premiums for each of those is say… just USD 400, that’s a total sum of USD 3,600 worth of premiums that I’ve collected in my pocket, for which I am no longer liable. That’s for this past week.

Other weeks, it may look something like this:

Trivia: Spot the Disney contracts here!

Who says EXPIRED stuff is bad for you? They add a nice CF of around USD 15k every month for me. And I intend to ramp it up further.

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Finally, let me end off with a little gift for ya. I get tons of confused queries about buying calls vs owning the direct equity, why not sell the calls instead, why not sell the puts etc…

So much so that sometimes, I get confused by the questions myself too.

So here’s a little, simple table that sorts everything out:

This is what I think anyway. So if I’m extremely bullish, I’d buy the calls. If I’m bullish but see potential hiccups aka not that certain, I’d sell covered puts.

This is of course, just a simplistic table. (I didn’t include the sell short equity option cos I don’t normally short sell)

There are also the effects of how much in or out of the money the contracts are.

For eg. I could sell the covered puts, but sell puts where the strike price is in the money instead of out of the money. IMO, the exercise price is determined by how keen I am to build an actual equity position. (which is affected by the bullishness or bearishness over the longer term, not just during the duration of the contract)

Then finally, there are the other minor considerations that sway some of my decisions, like the vega of the option (which helps determine the risk I’m exposed to when I own or sell the contract, and that in turn, determines the amount of liquidity I need to set aside for this contract), and the implied volatility (which determines the amount of premium I’d receive)

Alright, that’s all I have here.

Need to go on a date with Broadcom now.