Financial Freedom Sloth

achieving financial freedom one lazy step at a time

Tag: options

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!

Special circumstance investing

So after having explained my general views on investing. And why I really, really like the combination of our low interest rate environment, CfD’s and Lynx (a reseller of Interactive Brokers). I will now go into a bit more detail of what I did in 2016 with the newly discovered tools and what I am on the lookout for at the moment.

2016

I covered most of this in my post about the origin of my stash. But I’ll try to give a bit more explication on why I did it and the difference leverage made.

The first opportunity I had to use leverage was when AB Inbev made a take offer bid on SAB MILLER. They offered 44 GBP but the market had doubts so the SAB MILLER stock traded at 40 GBP. This was a 10% gap. I had no doubts that a) the take offer bid would materialize and b) this would happen in less than a year. So what I saw was the possibility to borrow at less than 3% to make around 10%. I was confident because I knew AB Inbev for more and a decade, this was the final piece of puzzle they had been putting together for a long time and they had successfully done the take over/merger with Anheuser-Busch. But I also looked at the downside and there the picture looked good as well: SAB MILLER had actually grown more in the last years than AB INBEV, the markets they operated in had more promise, they promised to apply the cost cutting culture of AB INBEV if the merger did not go through and they actually paid a dividend that almost covered my financing fee. The downside was actually not all that bad. Sure, the stock of SAB MILLER would probably drop to around 34 GBP (the price before the offer) but looking at the economics of SAB MILLER I felt confident they would be at 40 GBP within 2 years. So merger goes through: I make a nice and quick profit, merger does not go through: I’ll still make a profit but it will probably take 2 ears or more. So I bought 5000 CfD’s on SAB MILLER at around 40.50 GBP. The brexit and a change in margin requirements would force me out of the trade but in the end I still made a net profit of 8366 GBP. Less than I had anticipated but since the leveraged position was about the size of my total stash it did add a nice 4% extra return. And I made it between the end of December and mid June. the leverage made all the difference. Without it I would have been forced to find some free cash or sell other stocks. Berkshire was around 130 USD when I started the leveraged position and it was 140 USD. It had actually gone up 7% in the same time period. Not using leverage would have made me miss this run up in Berkshire Hathaway.

With the SAB MILLER position active and me not needing to work at the time I grew bored. So I tried my hand at day trading. Technically it was day trading because I was buying and selling on the same day. But actually I had identified some stock that was cheap and I wanted to buy some. I just didn’t feel too comfortable with already having a 200.000 GBP leveraged position so as soon as I made some profit I closed the position (and thus the extra leverage). I practiced a bit with Berkshire Hathaway and Coca cola. And then when Google went down to 730 USD I really had some fun with it. Real day trading is off course have dozens or even hundreds of trades and playing both an uptrend and downtrend in stock price. I just bought stock I thought was cheap and then sold with a small profit. Sometimes I only did 1 or 2 of these trades, and some days 6 or 8. I found it to be way to much work and also too much stress but I did make around 2.500 USD in profits from it (another 1% added to the stash). But it would have been much more profitable to just buy Google at 730 USD, keep it for a few months and then sell it around 780 USD. I just wasn’t very comfortable with that amount of leverage at that time.

But a friend of mine had combined everything we had learned about investing and the possibilities that Lynx offered and found a very interesting construction one could set up. I will not go into detail because it uses around 2X leverage (very, very dangerous!) and you should only do it with some very specific stocks (1 in particular is well suited for it) at certain price points. No need to feel left out as at present prices, one most definitely should not do it!

But in June 2016 the price was right and with the leverage of SAB MILLER gone I myself set up a similar construction. This would net me around 10.000 USD a 12.000 USD. With the leverage involved and the long period of the construction it is a bit difficult to determine the exact profit (or I should start keeping more detailed records, for which I am way too lazy! The construction was wildly profitable and that is good enough for me).

In-between all of the above, and because I was now making profits with my leveraged positions I also wrote a few puts on Berkshire Hathaway, none of them called because Berkshire Hathaway had a really good 2016! I would have liked to buy extra shares at a lower price but the 1 500 USD in premiums was nice as well. I did pick up some Berkshire Hathaway shares to hold and add to my collateral (all that profit had to go somewhere).

Looking at 2016, it may seem as I was all over the map. But if you discount the ‘day trading’ activity I actually did not do a whole lot of trades and I was only active in 5 different stocks. All of which I have known for years, or even decades. For me, most of the work is in identifying good companies to invest in. Once that is done, doing trades in them, even if that is with options or via CfD’s does not take a lot of time or effort. It is my long held belief that an investor only needs a handful of quality stocks he knows really, really well and a good understanding of all the possibilities of options to do very well for himself.

Thanks to the smart use of leverage I added a bit more than 10% extra return to my stash.

2017

Early in 2017 I could repeat the construction from mid 2016. This will add around 24.000 USD to my stash, or an extra 10% return. The price point at which I could do it was stretching my comfort zone somewhat. A sharp drop in stock price is the only risk I have, stock price remaining equal or going higher do not make any difference (I do have around 5% downward protection, but after that, things become dicey). At 2 times leverage I have felt a bit unsettled but we are now one month into it and prices have risen another 6% so that does give me another safety cushion!

Setting up the construction only took 5 minutes (10 if you add the time i spend on my parents stash) and then left me with not a whole much to do. I grew bored. I also came to the realization I like investing. I like it a lot. I have literally zero need to keep reading financial and economic stuff but yet I continue to read, read, read.

I miss being active and when I find something really, really smart I am not ashamed to admit I drool over it.

I am drooling over UVXY. it seems to be a product designed to go lower in price over time. Financial velociraptor found it. Which makes it ideal to short it (or buy puts on it). With the construction it is prudent to keep a decent amount of cash at hand. Especially in the beginning. At the moment that is around 40.000 USD. Over time, the leverage is going to cost me around 12.000 USD.

So me being bored, having found this really cool stock to play with and having a lot of cash available. Well, I had to try a trade in it! I copied Velociraptors last trade. It is not beneath me to copy somebody’s cool idea! So I bought three contracts of UVXY190118P00013000. We will see how it turns out. It is ideal to familiarize myself with it. The longer the construction runs, the less need to hold large amounts of cash. So starting slow with not too much cash and slowly building my confidence in these trades and making them larger as time goes by is ideal for me at the moment.

Prices of most stock are pretty high but I am looking at some stuff.

Resilux, there is a takeover bid at 195 euro and the stock currently sits at 188.75 euro. Takeover bid has the support of current management and there is a fair change it will go through. At 185 euro it would be a nice CfD play. Doubtfull it will go so low, and volume is also low but I have set an e-mail alert on it at 185,50 euro.

Vandevelde got knocked down to 57,5 euro. They pay a net dividend of 4.2% at current stock price (3.5 bruto – 30% taxes). But I do not like them paying full free cash flow in dividends, or being geographically limited (bulk of their sales profit come from Belgium and France and with the upcoming presidential election in France, 2017 may be bumpy). Still, good company with a nice product (Belgian men know what I am talking about) and well run. But too many doubts.

I almost wrote some puts on coca cola when they stood at 40,50 USD last week. I wanted a slightly higher premium and also visited some friends on the day I was planning to do it (and I forgot t take my log in information with me, doh!). Here is hoping they go back down. Last time Coca-cola was around the 40 USD price level I made around 15% in a 4 month time frame. Would like to repeat that if at all possible! Set another e-mail alert at 40,80 USD. I would write 5 put contracts at strike 40 and an expiry 5 to 6 months away. Can stocks please go a bit lower? It’s starting to become a bit ridiculous!

And then there is another takeover arbitrage possibility. Bayer wants to pay 128 USD cash for Monsanto but Monsanto is only trading at 110,70 USD at the moment. That is a nice 15% gap. It is also an arbitrage Buffett is apparently playing and he is seldom wrong. But I need to do my homework on Monsanto first. Would I mind holding the stock for some time at current price if the deal falls through? Since I am already at the max leverage I want to tolerate, this would actually be something for the girlfriends stash. So I really need to do my homework. She still hasn’t decided if she wants to actually make a profit of Monsanto as she doesn’t like the company or its products. Personally I am amoral if it comes down to investments but like I said, I really need to read up on Monsanto before risking any of the girlfriends money. If I do it, I will limit the leverage to 1X or even only 0.75X of her stash.

So this what I have done in 2017 and what I am currently looking at. Did anybody make it all the way to the end?