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.

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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!)


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.

“Asia Enterprises Turns Around in FY2016” -Is That So?!

Seems like people are really interested in what my friends have to say. My last post (Lessons From A Super Investor – A Personal Friend Of TTI) became the most clicked on post here in the short span of 2 days.

I said that probably out of the 1,000+ people who will read it, nobody would know who he is. But within the 1st day, 1,700+ people have read it and I get tons of queries about him on IN. Anyway, coincidentally, just yesterday, I saw that Bloomberg reported on yet another highly successful acquaintance of mine. I may write about that at a later stage.

But now, let me get back to my drug: deep value analysis.

As a previous shareholder of Asia Enterprises Holdings (AEH), this is a company I am familiar with. Plus it’s financials are a breeze to examine in detail, compared to some of the other companies I’ve worked on. All it took me was 2 hours of work on a cold rainy night with a cup of hot chocolate in hand, and I could dissect the Q4 results and relate it to the steel industry more intimately than most existing shareholders probably understand.

AEH was a pretty profitable investment for me, and my divestment several years back, was due to a recognition of the severe stresses the industry would likely face in the future (which is now). Basically, I didn’t like how China was churning out record amounts of steel then.

175) asia enterprises holdings

“Asia Enterprises Turns Around in FY2016 with Net Profit of S$2.4 M” This is the heading of the news release accompanying the Q4 results release. On closer inspection, I think it’s somewhat inaccurate. Not wrong, just inaccurate.

440) AEH long term financials.jpg

This is AEH long term, compiled financials. As we can see, the earnings really started deteriorating from FY12 onwards. Instead of the 3 cents prior to FY12, normalized EPS became <1 cent after that, culminating with a massive loss of -3.53 cents in FY15.

The steel industry has gone through hell in the past couple of years. The recent FY16 did show an improvement, closing with a 0.68cent full year EPS. So it does look like a turnaround of sorts.

However, steel prices did not rise significantly in FY16. Neither was AEH able to raise their prices, and in fact, their ASPs (average selling prices) actually dropped, albeit buffeted by an increase in volume moved:

441) AEH statement.jpg

So how did this “turnaround” come about?

As per the statement above, it came about from “a higher gross profit margin and its continued tight rein on operating overheads and expenses…”

But wait! We just mentioned that the ASP dropped, how did the company achieve a higher GPM then? In fact, if you look at the table above, GPM more than DOUBLED y-o-y!

Well, if your selling prices dipped, volume maintained, and yet you can more than double your GPM, the only logical conclusion is that the COGS has been more than halved!

I’ve previously described how the company calculates it’s inventory. It’s done via a weighted average approach:


LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

FY15’s massive loss was largely due to a huge writedown of approximately $10mil +. See the table above, that’s parked under “Other Charges”

Well, following this write down, the inventory cost recorded in AEH’s books are now much lower than before. Which explains AEH’s much larger GPM, and that in turn explains the “turnaround”, despite industry conditions still remaining in the doldrums!

And that’s why I said it’s “inaccurate”

Essentially, AEH bit the bullet and took most of the pain in FY15 (“kitchen sinking” is the term, I believe). This allows them to look better in subsequent years.

Probably a more accurate way to look at it is the average out the EPS to iron out the massive write off. So you could think of it as AEH having -3.53 EPS in FY15 and “turning around” in FY16 with 0.68 EPS, OR you could think of it as AEH reporting -1.425 EPS in FY15 and FY16 each.

Obviously, the former scenario is a more sexy story.

AEH currently trades at 68% of the book value. It is this parameter, that seduces many “value investors”. I can imagine many value investors crunching numbers in some spreadsheet, or using some app with parameters. AEH will surely show up in such a superficial screening.

I have previously cautioned against using such a simplistic manner to invest. Trust me, I’ve been down that road.

AEH will ALWAYS trade at a discount to book value.

So it looks deceptively cheap. Let’s think about it. In industries where you typically get companies trading for long periods, at large discounts to their audited book value, you’d start to see M&As happening.

And that makes perfect sense. Cos the bigger, better capitalized players will see that hey, I can buy over these guys at pretty much book value, and grow much more rapidly than taking the organic growth path.

Yet the steel industry has practically no M&A to talk about. Zilch. Kosong. Nothing.

The reason is because these companies are worth at the extreme most, as much as their inventory. That’s all. There’s minimal differentiating factor amongst each of them. You don’t get more “branded” rebar steel to build an upmarket condo, do you?

This means that when assessing the value of a steel middleman like AEH, one has to consider a 20-30% discount to book value as the norm.

Imagine if you have the funds and you decide to buy a private steel middleman. Would you pay book value for the inventory? No! Cos if you’re going to pay book value, you might as well buy directly from the steel mills right?

If you’re buying in bulk, you want a massive discount to account for the larger capital outlay that you’re committing, the risk of obsolete inventory (yes, even steel inventory can be obsolete because some of their steel bars come in specialized shapes and sizes and may not be commonly utilized by the end clients), the opportunity costs etc.

10) LTC corp steel 13052016

The other minor bugbear that I have with AEH, is that the father-daughter management pair, have no qualms paying themselves relatively well, as a proportion of the profits of the company.

Yes, yes, theoretically their remuneration is decided by the Remuneration Committee and not them but I’ve already explained in earlier posts, why this is hogwash.

In 2012, their combined remuneration (not including the other directors!) is $915k. The company’s NP for the year is $1.7mil.

In 2013, the combined remuneration is $1.041mil. The company’s NP is $3.7mil.

In 2014 and 2015, they got smarter and started reporting in bands instead, putting some roadblocks in front of pesky deep value investors like TTI. Their combined remuneration ranges from $750k-$1.25mil, when the company’s NP is $1.9mil and loss of $12.1mil(!!!) respectively.

Paying yourself 1/3 – 1/2 of the company’s entire NP seems excessive.

On top of that, one item caught my attention several years back when I was a shareholder and since then, I’ve been monitoring it.

442) AEH IPT.jpg

Every year, the company pays an external vendor (Penta Transport Services) a certain sum. It is a private company, but logically I am guessing that Penta transports the steel bars from the warehouses to the end clients.

This is also reflected in the amount paid to them. In years where more inventory is moved, the amount paid is higher and vice versa.

Plus it says as much in the name, doesn’t it? LOL.

Anyway, and this is not in the AR, I had to investigate this separately: Penta Transport Services is a sole proprietor business, and it’s registered business address is…

36 Penjuru Lane

Hmmmm….. does that address look familiar to you?

Well, it should if you are a shareholder. Because it’s the address of one of the 3 warehouses the company owns!

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Uh huh. So the company pays an external vendor for transportation services, it is an IPT and the business is a sole proprietorship so probably it is owned by a family member. The registered business address is also that of the company’s property.

My simple question to the management , if I’m still a shareholder, is that why can’t the company set up and provide it’s own transportation services?

This is not high science. You get a lorry, hire a driver and that’s it. Why must we do an IPT and allow profits to be earned by more of the Lee family? And yes, of course it’s profitable. I don’t think the Lee family is so charitable as to have a privately owned transport business absorb some losses for the sake of publicly listed AEH.

These little tidbits of information that I’ve dug up, tells me that the father-daughter pair, do look out for themselves. They remunerate themselves well, and I’m sure they are doing a fine job at AEH and all that, but I don’t think there’s the… errr…. hmmm how do I explain this… sacrificial? type of management attitude here.

The most successful management I know, have a certain attitude towards their companies. Basically, the company is like their baby. Ask any parent how they feel about their baby and you’d know what I mean. I see that in many privately held companies, where the main guy is the founder. 

It may be wishful thinking, but I do think there are some listed companies where the main guy running the show still has this sorta attitude. One has to attend AGMs, meet the people in charge and literally look them in the eye and ask hard questions to get a sense of this.

Or you could follow SG TTI and dig deep and hard for such clues.

Anyway, I did say at the start that these are minor bug bears. I don’t consider them to be big issues because well, there are many companies where the management pays themselves excessively well. On top of that, if the earnings of the company isn’t high, proportionately, the remuneration tends to look high. (Not every one is a Johnny Liu who pays himself dirt little and still performs at that level)

If the company has losses for the year, it is also not realistic to expect management to not pay themselves right? I still think it’s excessively high, but am not surprised by it.

The IPT is not surprising as well, similar set ups can be seen in many other listed companies. All that I am saying, is that if AEH is a private company, owned by the Lees, and if Penta is an external vendor not owned by their family member, AEH would probably have taken over the transportation themselves and kept the profits within the company.

This is a minor issue though, simply because the IPT figures are not high:

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In short, I can’t really fault management for looking out for themselves. I don’t particularly like it, but at this stage, it’s not a big issue.

I wrote 2 earlier posts on AEH:

Asia Enterprises Holding Ltd Analysis – August 2016

LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

Back in August 2016, I concluded:

“I’ve always maintained that it’s a fool’s game to try to accurately predict share price movements in a specific manner in the short term. Still, I’d attempt to be a fool by stating that my best guess is that AEH’s share price will remain within a tight range of between $0.17-$0.19 thereabouts for a long time. Perhaps till the end of 2017.

Looking at the chart above, if one makes an investment in AEH sometime in late 2009/early 2010, you’d have seen almost no real capital appreciation since almost 7 years ago.

I’d reassess the company again if the share price approaches $0.165, before determining whether to take a position in the company.

Finally, I’d like to stress that I do not have a negative view on the company per say. I just don’t think there’s sufficient MOS at this price for me. The company may do ok, or even moderately well in the short to mid term. All I am saying is that this isn’t the deep value, contrarian opportunity that I’m hunting for. If I already own shares in AEH, I wouldn’t be selling out at this level either.”

Seems like I’m a pretty accurate fool thus far in this regard.

The share price rose very gently and practically hovered around $0.17-$0.19, and at the time of writing this, is at $0.186.

My conclusions back in August 2016, remain my opinion today.