Financial Freedom Sloth

achieving financial freedom one lazy step at a time

Special circumstance investing – march update

The UVX put I bought will take some time to move into a profit. And I am getting bored again.

What I did

So yesterday I sold 2 put contracts on ABI, strike: 100 and expiration in May.

This gets me a premium of 3,95 euro which is not a bad return for a 2 and a half month time period. Another 790 euro of cash added to the stash. This is actually less than 0,3% of the stash but if I can do it 2 more times I will have added another 1% to my return this year!

If I get assigned I buy a great company with a decent dividend at 96,05 euro a share. I chose the lower strike of 100 euro as I do not really want to be assigned. I do kind of have the money to pay for the shares. You see, my special construction (which I do not explain since it is highly leveraged stuff) pays me a lot of cash up front: around 38 000 USD. Financing fees will eat up around 14 000 USD during the life of the construction but in the end I should end up with around 24 000 USD in profits. I keep all this cash as cash as things can always go wrong and then I need to move fast and close the construction. But with the recent rise in stock prices I now have a nice little buffer and I abhor cash not working for me! These puts are a way to get some return and most probably still keep the cash buffer intact. I have to admit that I do like making money on money I made with money I do not own!

stack of stones

balancing my investments on top of each other

The risk of things going bump in the night

If everything goes well I’ll have made a bit off extra cash. If stocks start going down again I will close the construction (which I would do anyway) with a small profit. I will then not have enough cash for the 200 ABI shares. But if I do get assigned the ABI stock, I still have the ability to buy them with borrowed money from Lynx. This will then be the only leveraged position I have. It will be less than 10% of my total portfolio. Dividends of ABI would cover most of the financing fees for this leverage so I could keep it for a very long time. Most likely I would also write covered calls on the position, more than generating enough cash to cover the financing fees. With leveraged plays I always look at the possible downside and then determine if the risk is acceptable.

Variation on a theme

Whendoyouretire did a similar trade but at 110 euro strike. That’s actually pretty smart of him because he does want to get assigned since he is a dividend growth investor! If the stock does go higher, he will have earned one hell of a premium! Since I would prefer not being assigned I chose a much lower strike. But that is one of the main advantages of options. With put and call, sell and buy, moving the strike price or the expiry date, options actually offer you a very big pallet of possibilities for a whole lot of different purposes.

The girlfriends portfolio

I only figured out the construction in June of 2016 and I first wanted to test it out in my stash. This meant that the girlfriend was a bit late to the party. Her construction ends in March. At present prices I do not feel secure in repeating the construction for her. So yesterday I unwound the construction in her account. Total profit of it was around 7.000 USD. Not bad for 6 months. I also opened a new 1 x leveraged position (the construction was 2 x leveraged) in Monsanto with the use of CfD’s. Only 1 x leverage as I want to avoid any possibility of margin call on her portfolio in the small change that the merger between Bayer and Monsanto falls through. I am also keeping her construction profits in cash as an extra precaution and to cover the overnight financing fee’s of the CfD’s. When Monsanto moves higher and the risk of losing money on the leveraged position gets smaller I will look for a way to invest some of this cash. Financial Velociraptor did a similar merger arbitrage play but without the use of any leverage I think. The merger arbitrage of Monsanto first came on my radar when I read Berkshire Hathaway did it. But one should always do one’s own homework. I am not that impressed by the performance of Monsanto but the 2 billion USD breakup fee if the merger would not succeed convinced me. If the merger does not go through (and Bayer has 2 billion reasons to make sure it does happen) Monsanto will be sitting on a mountain of cash!

That is me done until I can profitably sell my UVXY put. Time to start concentrating on my diet!

6 Comments

  1. Nice assessments, hope they work out!

    • finan112_wp

      March 10, 2017 at 4:21 pm

      Hope so too, Monsanto is moving a bit in the wrong direction, but early days. We will know in a few months…

  2. I am with you on the ABI puts… I own several as well, at different strikes. Some are cash secured, others are with margin. My 100 strike is in the March expiry… It is on the dance floor right now. I might look to roll down and out for a premium. On the other hand, Holding till ex dividend and having covered calls in the mean time is an option as well. Not sure yet…

    Still curious to understand your leveraged CFD play… When we carpool, you need to explain!

    • finan112_wp

      March 10, 2017 at 4:25 pm

      Yes, ABI at 100 euro/share is not a bad price but perhaps I might roll them further out in the future as well if it close to strike to avoid assignment. Not sure either, but I’ll see in May.

      I’ll explain the leveraged CFD play but at current prices and with rising interest rates in the USA the moment may have passed. But always good to have that arrow in your quiver for the future.

  3. I really like the explanation. I am going to have to take a look and see if I still like the construction of my portfolio and make sure it still makes sense.

Leave a Reply