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frommi

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    How do you weight your holdings?

    in General Discussion

    Posted

    Ok than you are not really further levered up. Its just like the whole portfolio is leap call BAC+long JPM,C,SHLD. The leverage is in the leap call and you can`t really blow up completly but you have a lot of downside risk. Thats ok, as long as you can live with it. And through your derivative setup you are removing the call premium but pay margin interest instead.

    How do you weight your holdings?

    in General Discussion

    Posted

    Eric

     

    Your act of taking margin debt to buy BAC common (buying puts to hedge it) is no different than what a bank does, am I right? A bank is short near term and long the deep end of curve and profits when yield curve is upward sloping. You are like a bank that is betting on a bank. This works great as long as fed is accommodative.

     

    When yield curve inverts, will you close down the margin debt? your margin debt if tied to fed funds will keep going up and total costs (margin interest+ diminishing put premiums) may not exceed the returns on BAC.

     

    I don`t think that a bank would be allowed to do what Eric is doing. When you look at the risk profile Eric has just a big LEAP call position in BAC and is long in JPM,C and SHLD. If this risk profile is further levered up or not does he only know himself, but from what i read its further levered up. So when a 100% stock portfolio will suffer a 50% drawdown he is on the edge of losing everything.

    I don`t think that is something worth copying, especially with this combination of securities. Let argentina blow up and he is probably in trouble.

    But as always thats my understanding of his situation, i can be wrong.  :)

    How do you weight your holdings?

    in General Discussion

    Posted

     

    Yep, but let me ask you something.  Where in the hell are you getting the notion that I don't understand any part of that?

     

     

    Nowhere. You are a great mind and it is a pleasure to understand everything you do. Thanks for being so kind to lay down this whole thing, because now i fully understand what you are doing and it starts to make sense for me.

    How do you weight your holdings?

    in General Discussion

    Posted

    ERIC, correct me when i am wrong but you are saying that you can lever the upside without risk. And that is simply not possible, you can only move the tail risk to an end where you want to have it. Its not possible to remove the tail risk completly from the equotation. If that was possible, every investment company in the world would do this because this would mean free money. And Richard is right when the BAC idea stand alone is a good one, it doesn`t need additional legs. What you are doing is a pairs trade where you move your blow up risk to another end.

    The best way to short?

    in General Discussion

    Posted

    I just closed my TWTR trade with a return of around 25%, not bad for 2 weeks. But i was lucky because TWTR has not really moved :). I learned a lot, and i think i have now the answer to the topic.

     

    The best way to short depends on the IV of the options of the underlying.

     

    When IV is low buying puts is the best option, when IV is high selling OTM Calls with around 40-50 days to expiration. In any other cases its buying an ATM put and selling an ATM call, that is a synthetic short stock, but without the need/cost of lending the stock. Of cause you need a mental stop loss for that kind of position.

    what do you do to stay patient?

    in General Discussion

    Posted

    I don`t view it as so negative, when you have something better with more upside potential why not switch? 35% in a short timeframe is not too shabby and you simply don`t know what the stock will do next. There are only very few stocks that you can hold forever and most of the time you know it only in hindsight. And when you don`t sell after 35% you probably aren`t able to pull the trigger at 100% either. But at some point the undervaluation is away and you have to rely only on the business running well. The margin of error has evaporated and without it the holding is now a lot more risky.

    LEAPS, Portfolio Cash and Leverage

    in General Discussion

    Posted

    I don`think its a good idea. You should perhaps think about the other side of the trade to understand my point. You can be relative sure that you buy the call option from a professional options trader. And what does the options trader do? He buys stock or other options to hedge his trade. So what you are doing is paying someone else to buy stock for you, because you want to be protected on a large downswing. When you are not sure if the market rises further and your holdings are fair or overvalued then either sell covered calls on your holdings or sell and buy undervalued stocks.

    Balance sheet focused analysis

    in General Discussion

    Posted

    I read a recent white paper saying that, in aggregate, these Chinese stocks perform at or better than the market. I don't think location alone is enough to say they're a fraud or not. Maybe subject them to an M score, but otherwise, if they meet your criteria for investment, include them.

     

    I exclude them all, because i can`t detect a fraud. But perhaps thats the reason they are so cheap.

    The best way to short?

    in General Discussion

    Posted

    My thought was that the possible outcomes of stock prices in x days are under a gauss curve. So if tommorows stock price is todays +- y and y is random, that leads to a distribution curve where a high amount of outcomes are centered arround the current price.

     

    When i get the most profit at the top of the curve, i have a high winning chance. At the tail ends i have to do something. You can simply cut your losses or sell more calls with a higher strike.

     

    You can create other bear option strategies like bear call spread, but then your maximum loss is exactly at the current price, which is bad when i am right about the distribution curve.

     

    More about option strategies http://www.optiontradingpedia.com/free_deep_itm_bear_call_spread.htm

     

    I am testing my strategy now with TWTR. I sold 3 Call option contracts and bought 100 stock. I will report how this worked out.  :)

    The best way to short?

    in General Discussion

    Posted

    And now don`t directly short it but buy the etf and sell 3xatm call options. That way you profit when is goes down a bit or it goes up a bit. That looks like a fireproof way to make print money.

     

    For example for SOCL, when you sell 3 22$ Feb14 Calls and buy 1xSOCL you win when in 6 weeks the etf is between 19.8$ and 23.1$. You make the greatest profit when it stays at 22$, then you make 84% annualized, at 21$ around 47%.

    The best way to short?

    in General Discussion

    Posted

    On the other hand, going short an index and using margin to go long undervalued stocks can move against you (twice...) just as hard.

     

    Yes but i have a diversified portfolio of mainly bluechips at the moment, so it moves with the market up and down. (But with a little bit of alpha on my side at the moment)

    And i am currently only 4% on margin, thats hardly game breaking. With a concentrated portfolio approach in smallcaps or high beta stocks i wouldn`t mind doing it. I am perhaps a little pussy but i don`t like high volatility when it runs against me and on the other side i am not able to sit on huge amounts of cash. Everytime its there i want to lift my passive income with it.  ::)

    The best way to short?

    in General Discussion

    Posted

    In the last 44 years there were 13 drawdowns greater 20%, thats around one every 3.3 years. When i buy every year a one year put option for the portfolio, at the current prices of the options that costs me 5% in every year that that doesn`t work. So i loose 3.3x5%=16.5% in 3.3 years. In that one year it works i win ~15% assuming that the put option goes up 3x. (with volatility increases that can work). In the year following the crash year i will get 15-20% higher returns as without the puts because i can invest at lower prices and the following returns are on a higher base.

     

    This can be surely be optimized because i don`t have to hedge every year. But for 2014 its probably not a bad idea to do it. There is only 1 crash in the next 3 years necessary to profit from the hedges. (It surely doesn`t work when the market rises to the middle of the year and then crashes to the level of the start of the year.)

     

    Any thoughts?

    The best way to short?

    in General Discussion

    Posted

    Ah thank you tombgrt, i just slapped myself for not thinking about buying a put on the index. That is a lot cheaper than on something like TWTR. After reading a lot i really don`t like to directly short a stock. Something that happened at VW can happen in every stock and i really don`t want to get caught in that kind of situation.

    I looked it up for SPY, a at-the-money put option has around 5-6x upside if the market crashes by 40%. So in that case with a 5% short position i can reduce the maximum drawdown of the whole portfolio to around 10% ( in theory  :) ) and have a big buffer to invest when that situation unfolds. That can even allow to get deeper into margin.

    I should do a backtest and see if that was adding value in the past. I allways liked to go out of the market from may to october, but that can be the solution i looked for.

    The best way to short?

    in General Discussion

    Posted

    While thinking about the short context, i thought about shorting and what is the best way to do it.

    Looking at some stocks like DDD or TWTR i thought that the mispricings on the upper side are a lot greater than on the lower end of the spectrum in the current market. So how is the best way to profit from that?

     

    For example for DDD (current price 92.5):

     

    - Sell 95$ Calls

        pros: get 20% if the stock stays below 95, get money upfront

        cons: unlimited downside

    - Buy 90$ Puts

        pros: limited downside, upside around 200% when the stock is halfed

        cons: high premiun, cost of leverage > 20%

    - Naked short selling:

        pros: get money upfront, don`t have to worry about options, can put that money to work in undervalued stocks?

        cons: unlimited downside, if short selling is banned you can loose your shirt

    - Sell Calls, buy puts with the money?

        isn`t it the same as naked short selling?

     

    Is hedging the portfolio that way a good idea, and if yes how would you do it? (I thought about hedging with gold/bonds, but they are too expensive for that at the moment for me.)

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