Smile Just Got A Bit Wider

758) Thanos snap.jpg

Thanos snaps his fingers and half the multiverse population disappears.

TTI snaps his fingers and US ROI doubles.


Yea, if u haven’t figured it out, TTI is a fan of Thanos.

Avengers? Bleh. I don’t understand why is Thanos the villain. I know I’m the odd one out cos when I discussed my views, none of my friends agree.

Yet, why exactly, is he the villain? He just wants to balance the universe. He’s not doing it for personal gain, he doesn’t gain anything. The glove’s destroyed after he used it btw. Yes, it looks like population genocide, but hey, the guys just… disappear. They don’t writhe in pain and explode or something like that. I mean…. he’s thinking at a higher order. And he had to sacrifice his own daughter. And he was REALLY genuinely mourning. It hurts. Yet, he did what he had to do.

I really don’t see why he’s the bad guy. BTW, the movie probably didn’t emphasize this enough but Thanos is a super genius too. So… yea.

Go Thanos!


My last post was barely a week 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.”

Then, the global/US portfolio ROI year to date looked like this:

754) YTD

What a difference a week makes, esp when my options are spot on.

Cos after just a week, at the halftime mark of 2018, US options portfolio YTD ROI looks like this:

756) ROI

Money Weight Returns almost DOUBLED from 1 week ago. (not quite, but almost)

11.16%. I’d be happy if the entire portfolio ROI ended 2018 with this.

Here’s the kicker though:

Overall portfolio ROI didn’t change much. (Yes, I double and triple checked). All thanks to a corresponding drop in the SG portfolio.

Ah well.

It still broadens the smile on my face a bit as it reaffirms my thoughts and strategies. Now I just need to double down on my strengths and competitive edges.


Since my last post, I got a few emails from folks who now wanna get on the volatility train.

Let me be absolutely clear here:

The returns are NOT because of my volatility bets. Not solely anyway.

I repeat, NOT VOLATILITY.

I take no responsibility if anyone’s portfolio blows up cos u decide to jump onto something that gives supposed out sized returns.

As the saying goes… the ______ does at the end, what the ______ does at the start.

Fill in the blanks with the words “fool” and “genius”

I utilize volatility derivatives as a hedge. It took me some time to figure things out, but I think I now get the erm…. nature of it. Not sure if I’m describing it accurately. The feel of it.

Underlying my positions is my belief that, and I’ve stated this numerous times, that I don’t think we’re going to get new highs for this year.

TTI’s Short Hedges

Unless the Fed goes crazy and reverses course and starts pumping liquidity again. That’s a scenario that’s akin to Saudi Arabia winning the world cup. (Gosh, did u see them play in the 1st game?! I thought they were Geylang United with their green jerseys!)

I read somewhere that 7 out of the last 9 rate tightening cycles led to recessions. That’s pretty good odds. So… structure your thoughts around that.

Instead, the bulk of the returns come from equity positions. Either direct equity holdings, or positions held in the form of options, both on the long and short side of it.

So here’s a quick breakdown of stuff I own or am looking at. Some positions are big, some are really puny. Things are very liquid though, and the overall nett effect is that I can switch from a nett long to a nett short position and vice versa very rapidly.

Valeant – I own zero shares currently, having taken profit fully at it’s recent high. Swung to selling put options as I still think the company’s undervalued. Debt problems are temporarily contained all the way till after 2020, giving Joe Papa adequate wiggle room to figure out how to grow it’s cashflow yet further to pay down debt. It’s a classic turnaround play. I sold out via selling call options as the share price was going ballistic, and even though I’m optimistic about the company… well, unless they figured out a way to cure all cancers permanently…. nothing goes up in a single straight line. Ever.

Chesapeake Energy – Again, took profit from the massive rise recently, with the recovery in oil. My view is that oil prices are not going to stay elevated. OK, I won’t act like I’m an expert who did intense DD on this. My view is shaped by my interactions and discussions with some oil executives. I think they know exactly how the industry is headed. A Syrian patient turned buddy told me some years back how the market is going to turn, and thus far, he’s been spot on. He should know what he’s talking about, his entire family across 3 generations is in the oil industry. His family owns oil assets and even then, he’s highly pessimistic. And yes, he predicted this recent upturn in oil prices. In his view, things are going to turn rosy, before it turns south again sometime in 2020 or so, and after that, it’s not coming back. Oil is really going the way of the dinosaurs.

Disney – What can I say. Fantastic franchises. Great brand, and ever lasting moat. Will Mickey Mouse ever be replaced? My young kids are crazy about Mickey, and I’d be spending some $$$ in their theme park in Paris in 2 months.

The company does has it’s challenges though. The take over of Fox seems to be proceeding smoothly, but Fox’s share price is at a premium to Disney’s new improved offer, indicating that the market is expecting a bidding war to continue. Disney has the upper hand now over Comcast, as they have regulatory approval, and they certainly have the financial firepower to nuke it out. I don’t like it though, cos it means Disney may end up over paying. Yup, that’s the effect bidding wars have. Yet, there isn’t any other assets out there that’s as complementary to Disney in it’s bid to go into streaming and challenge Netflix.

VIX/VXX – Like I said, they have been very effective hedges such that over the past week, when indices are green, my US portfolio NAV increased. When indices are red, the NAV increased even more! It’s really not quite as straightforward as going long volatility and leaving it there though. I’ve done that previously and it was suicidal. The contango kills u. So I’ve tweaked my strategy a bit to make it a mixture, depending on when I think there’s pricing misallocation. And… you’d be surprised. It does happen quite often.

Diebold Nixdorf – The chink in my armor. The weakest link. Of all my US positions, this has been the most unexpected. I say unexpected, not the poorest. I don’t mind if a company does poorly… as long as I can expect it. Cos if I analyze the company and I can expect it’d do poorly, I’d do very well (aka I can short it in a variety of ways, depending on conviction levels). Perhaps it’s the integration after the merger. That adds a huge chunk of assumption and many uncertainties that I cannot understand. Diebold is also not suitable for an options strategy as the IV is relatively low, and there are only monthly options, so my hands are tied.

Visa – Small, indirect, long position. Don’t really want to write too much about my DD here for now.

Centurylink – Another star performer. My dividend yield at 1 point was around 14%! Obviously the markets are expecting a dividend cut. The share price has since recovered strongly. This has been the easiest to construct an option strategy. It’s pretty much common sense really. I postulated that if the yield is that high (it really was 14% at 1 point!), then when it comes to XD, obviously you’d expect the share price to drop, at least somewhat. The reverse is true: if it’s CD, you’d expect some stability in the share price, cos… well, how much higher can the yield go? 15%? 18%? And the thing with an options strategy is that I don’t need to get it precisely right. I just need to be approximately right.

SPY/IVV – The lowest IV of the lot, and that means, option premiums are quite pathetic. Yet, they provide a very nice “counterweight” to my volatility derivatives, so I deem them to be a necessity. If one wants to choose an ETF for a direct equity position to match the global markets, I’d say IVV is much better than SPY, cos fees are lower. Over time, if you’re holding it, the fees do add up and impact on performance. Using options though, SPY is much better because of the narrower spreads, and higher liquidity.

LIT – An extension of my previous DD that I’ve done when taking up a position in Alliance Minerals (AMAL). Not a large exposure as the LIT ETF actually includes many lithium related companies that are NOT producers. In fact, they are actually users. Like Tesla. It’s like they can’t find enough lithium producers with significant size and liquidity, and yet die die wanna create an ETF, so they had to rope in anything that has a faint link to lithium. Weird ETF. (I still own some via options as they have exposure to lithium assets that I can’t get direct exposure to. Plus the option premiums give me a very nice safety net)


Lastly, this is the what transpired on Friday:

757) expiry.jpg

The premiums for the options that have expired in the past week add up to a grand total of US$ 4,182.32. Thats $4k USD every week, which is pretty much consistent as per my previously documented options activities, I think.

Options Records In Oct & Nov 2017

TTI’s Options Strategy – Results Thus Far In 2017

Bonus From Flyke (!!!) + Results From Enhanced Options Strategy

I also sold options on GE (oh wait! I forgot to mention GE above!).

GE’s way oversold IMO. Yet, the turnaround will be long and tough. I have had a front seat view with my experience in Valeant. Turnarounds aka U-turns can be short and sharp, it can be a wide U, aka long and tedious.

In my experience, if it involves cutting/managing excessive debt taken on previously, the turn around is the latter. A looooooong, wide and fat “U”.

So I’ve been careful with my GE stake. Put options are only sold after a series of many “red” days, and are a bit further OTM. Thus far, while GE has been burning other stake holders, my GE stake has been green pretty much since day 1 of owning it, thanks to nice premiums collected.

FYI, Valeant took something like 2.5 years or so to show signs of a turnaround so yea. No kidding about the big fat U.

Every position I initiate, plays a role in overall portfolio management (in US at least)

For example, the sale of GE put options above is obviously a long position. On paper at least. It means I think the share price will go up or stay the same. (In reality, I wouldn’t mind if it drops cos I want to buy more GE at $13, and I’m paid $0.23 in the meantime)

The sale of VIX put options though, is a short position. That provides some balance to my positions. And if my conviction level in any position goes high enough, I double down by adding some nice calls. I do own some VIX and VXX calls currently, amongst other calls. Conversely, I’m also not immune to selling naked positions. Prior to the recent market mini correction, I actually sold several naked SPY calls. Most have expired, and I still own some naked positions, but they’re so far out of the money that I can cover those positions right now for 1 bip. Yup. That’d cost like errr US$5 or something. LOL. So I consider those effectively expired.


Alright. That it. I’m on a flight out so that’s all. Short, sweet and sharp.

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7 comments

  1. Thank you for another interesting and yet informative post. I am currently in oil & gas industry and considering if to make a career switch. If your Syrian buddy is right, I may not see a bright future staying in the industry.

    Just wondering if you could also talk about your view on Singapore market especially on Geo Energy? Many thanks

    Like

    1. Hi Alex,
      I think even if there’s a fatal decline in O&G, it’d be a “long tail” event, i.e. a gradual decline over multi years.
      Sure, it’s still not good, but it certainly won’t be a sudden disappearance of the entire industry, so I’m not sure if you can make a decision that’s as major as a career switch, just based on a macro view like this. The industry can go to hell, but some ppl can do very well. For eg. in the previous downturn just before oil prices moved up recently, another executive that I spoke to told me business is booming. Cos he’s in the business of helping to mothball oil projects safely, and leaving room to ramp up again in future. So ironically, he’s in O&G but he was doing very well when things were going south last year.
      Best to make career switch decisions based on other stuff like current opportunities, where your strengths lie, what you like to do, your network etc.
      In short, things you know and can control, not macro stuff that you can’t.
      Specifically on Geo Energy…. I’m not sure what I can comment on that’s not already news. Geo is still trading on a PE basis, much lower than its peers, and the main reason for that is their MTNs that they have not deployed. Markets are very hung on the 8% coupon (btw, Adaro sold notes early last year at 9%, GEAR’s notes are sold at 9% coupon too). I can see and understand why so… the current environment is not good for companies with debt, although I’d also point out that Geo’s debt is a MTN issuance with fixed coupons, so they are not affected by rising rates.
      Probably the 2nd reason is the constant barrage of news on China trying to move into green energy. Now, THIS, I’m not bothered. China has always sought to limit coal usage, coal as a % of their total energy sources, has been dropping every year, but guess what? The tonnage burnt has been rising every year, cos the total energy needs have continued climbing year in year out.
      I will say that I am disappointed by Tung and management though.
      Geo likes to constantly release news on what they’re expecting, and yet, is never able to stick to deadlines. This creates a lot of market chatter. I think it’s dumb.
      Management should walk the talk if you want to talk the walk. Now, there’re always big words, with constant failure to deliver on time.
      Earnings though, continue to be very well supported, and I don’t see coal prices coming down anytime soon.
      Cheers
      TTI

      Like

      1. Thank you TTI for taking your time to give me such a detailed reply, really appreciate that. I am in my 40s, an engineer in O&G industry for more than 15 years. l must say the pay has been good, however after my previous company shut down Singapore operation due to the downturn, I have been considering a career switch even though I managed to find a job in the industry again. Thanks for sharing your thought. I am thinking that what you said can be applied to many aspects of life. One should focus more on factors within his/her control rather than trying to predict and rely too heavily on unknown future.
        Thanks again for your thought on Geo Energy. I have been watching this counter with a small position.
        Hope you have a smooth trip out there and coming home.

        Like

  2. TTI, I looked at your options strategy and I tried to understand it but every time that I look at some of the positions and think to try it out I run into the same issue with it so maybe you can enlighten me.

    The premiums for some of the put options are really low. For instance if we take a Disney put that is $10 away from the money then the premium can be around 10-30 cents (a wide range that really depends on vol etc. at the point in time). When you write 10 of those you pocket $300 and when you do ~10 of those on a weekly basis you can pocket $3-4k.

    The question is how do you manage the risk that this exposure creates? because while you get 10-30 cents per week per share your risk losing multiples of this. Some stocks like Valeant are very volatile and its enough that you will get his with a 30% decline one time to erase the profits of many many weeks. Even an allegedly stable stock like Disney could move down 20% in a matter of days, as happened in 2015 with the panic over subscribers loss at ESPN.

    I guess my question comes down to how do you manage the risk/reward here? it seems like you are taking small bites of food every week but when there will be a food poisoning you could vomit a year’s worth of small bites.

    Like

    1. Hi Yaniv
      Not sure which contract you’re looking at specifically, but I think your numbers are wrong?
      Let me use Disney as an example since you brought it up. I haven’t seen how far OTM it must’ve been for the premium to be 10-30 cents, but it certainly would be > $10.
      On the 26th April, I sold DIS May25’18 PUTS with strike price $98 (which was around $5 below the traded price then) for a premium of $1.71.
      Expiry would’ve been 1 month away then,
      That means each contract gives me $171.
      I sold 3 then, for a premium of $513.
      Maybe with this real life example, you can relook at it again?
      Cos I don’t really know how to explain your given example, or perhaps you were looking at something with only 1 day left before expiry?
      Another example: on the 8th May 2018, I sold DIS Jun01’18 contracts with strike price $97.50, for a premium of $1.45.
      I sold 3 of those for a premium of $432.

      So perhaps I can give some general answers instead.
      As I’ve mentioned a looong time ago, and multiple times after that, my option positions are built from a FA perspective. I sold Disney puts with exercise prices that I’d be happy to pick up. In other words, in the above examples, I would’nt have minded if the prices goes below $97 and $97.50 as I’d want to go long at those prices anyway.
      So to answer your question on “how to manage the risk that this exposure creates”…
      it’s the exact same risk that you’d take whenever you own equity, isn’t it?
      So how do you manage that risk when you own equity? I’m sure you have your own answers to that.
      VRX (now Bausch) WAS very volatile a couple of years ago, it isn’t right now. You don’t get 30% declines in a day anymore.
      Again, I’m happy to build long positions in VRX at around the $20-$22 range.
      I currently own only 1,600 shares, and have sold CALLS on these positions too.
      So it cuts both ways.
      So back to your statement:
      “Even an allegedly stable stock like Disney could move down 20% in a matter of days, as happened in 2015 with the panic over subscribers loss at ESPN.”
      well, my question is that what happens if you own the equity directly then? Isn’t it the same?
      So if one is afraid of large moves in your positions, you can either diversify by having multiple positions in unrelated companies/industries, or you can hedge by owning stuff that move asymmetrically right?
      All those same things apply even with an options strategy.
      I think we discussed about volatility derivatives previously, and that’s my form of hedging.

      Cheers
      TTI

      Like

      1. Thank you for the comment, it is well understood now. I looked at options that are shorter than one month and further away from the money.

        Bearing in mind what you wrote and relating to the Disney example, I still wonder: if you are willing to take a long position on Disney at $96.3 ($98 minus the $1.7 premium that you received) does it really matter if you buy for $96.3 or $103 (you mentioned you wrote $5 away from the money, so I’m using 98+5)? I understand that $96.3 is cheaper than $103 but its not that much of a difference. Furthermore, if the stock were to decline, it could have as well declined below $96.3 and then you would purchase it for $96.3 when you could’ve purchased at the market for $92 (assuming it declined to $92, just a random number below $96.3). So there’s an opportunity cost.

        And also, if you were willing to be long the stock (and assuming we are not trying to catch random 10-15% swings) and you write the put, it might turn out the stock would increase by more than the premium that you collected on the put. Then, it would mean that you effectively took a long position in the stock, but your upside is capped and your downside is only protected to a certain extent (distance from the strike plus the put premium that you collected).

        To state the obvious, you are better off only if within the time when you are exposed to the put the stock moves between the strike minus the put premium and the price at which it was when you wrote the put plus the put premium. In the upside scenario, owning the stock outright would have been better and in the downside scenario buying the stock at a cheaper price would be better.

        Given all these parameters, how do you balance all the above to decide on the course of action (do nothing, go long the stock, write a put, wait for a better price)? how do you decide in which situations the market misprices the upside/downside risks?

        Like

        1. Hi Yaniv
          Yes, all that you’ve just written is true.
          In this specific example of DIS, I’d have given up any upswing gains above that of the premium.
          (Some of my puts got exercised though, so in this case I got lucky and was holding on to some equity when the share price rose rapidly after the conclusion of the bidding war)

          I posted a simple table in the latest post, I believe you would’ve seen it.
          If I’ve a high conviction that I’m truly looking at something undervalued, and there’s a clear catalyst, I would’ve bought the calls directly (I’d usually even double down by selling the puts and recycling the premiums to buying the calls).

          Most recently, I’ve bought Broadcom equity, and am still holding to it. I sold some puts, but most of the gains come from the equity.

          In other words, what I’m saying is that it all depends on the level of conviction.
          So back to the example of DIS, you have rightly analysed that if I only write the puts and the share price goes up to $110, I’d have missed out on the gains from the $99.70 level.
          But of course.
          You’re describing it retrospectively.
          If I had knew then, then sure, I’d have bought as many calls as I can get my hands on.
          But I wasn’t expecting Comcast to back away so quickly, and there was always the risk of DIS overpaying in a prolonged bidding war, risk of Trump tariffs, risk of Bob Iger disappearing suddenly… Even now, it’s hard to say if they overpaid, it all depends on the subsequent execution.
          Since I’m happy to build a position in DIS at <$100 then, and I've no idea then if it'd turn out well, I opted to sell puts and keep rolling them over.
          So again, I'd refer back to the simple table I posted in the latest post.

          Right now, I'm mostly selling puts and calls on many positions, simply cos everything seems expensive.

          I'm more than happy to give up the opportunity to participate in major upswings… in order to avoid the risk of "participating" in major downswings…. and yet, still get paid a fairly acceptable premium. Yet if there's a scenario that I feel strongly about, like in Broadcom recently, I've no qualms taking a fairly sizable direct equity position.

          Lastly, I'd refer to what you wrote here:
          "I still wonder: if you are willing to take a long position on Disney at $96.3 ($98 minus the $1.7 premium that you received) does it really matter if you buy for $96.3 or $103 (you mentioned you wrote $5 away from the money, so I’m using 98+5)?"
          There are 2 points I wanna make in response:
          1) As mentioned earlier, you are looking at it retrospectively. If say… DIS lost out on the acquisition of Fox, the share price may be now $98. So talking about the potential "loss of opportunity" is retrospective here. But yes, I knew that I wouldn't get to participate in major upswings if the share price ran ahead anything more than the $1.70 premium.
          2) You seem to scoff at the returns, but time weighted wise, it's really not that bad.
          A $1.70 premium for an exercise price of $98 means an ROI of 1.73% for a single month.
          Now, this is the worst case, most conservative scenario, as in reality, we don't need to lock up $98 for a month. The capital is still free for you to utilize. (The exact amt the brokerage sets aside is calculated via a formula, hard to talk about it here)
          But let's say we are that conservative and we set aside $98 for every contract so that it's truly a covered put.
          With a 1.73% for a month, if we simply hypothetically snowball it for a year, that's a 20.8% annualized return!
          Not sure about you, but I'd actually be delighted with that.
          Bearing in mind that this is not even compounded.
          So it may look little, quantum wise, but relative to the time…. U get what I mean.
          On top of that, these DIS contracts were… hmmm how do I put it… they were sold under normal conditions. In some instances when the IV spikes up for whatever reason, the ROI from selling a simple put can be much much higher than this. (DIS's IV is… ard 40% only, which is hardly considered high)

          Cheers
          TTI

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