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.

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