TwoCitiesCapital

The writing of puts takes very little effort on blue chip stocks especially if you're not greedy about premiums and go decently out to 95%+ profitability range. I just don't see how this is anymore risky than owning the underlying stock. As Greg pointed out. Value investors are just as likely to hold BAC on the way to zero as someone who would write puts for premiums with the risk of potentially getting assigned. Now if you do this on say Beyond Meat yeah you're a moron. But doing this on SPY or other securities you would hold long-term, I don't see the risk. Maybe I'm missing something....the majority of you on here are much better investors than myself. How many of you would liquidate a portfolio of $SPY if it dropped 15% in a day? If this were to happen the person who got assigned shares now has the advantage vs the person who is holding. I could write covered calls and collect premiums while you have to hold until SPY climbs back to your dca before you could sell or write covered calls. Think about worst case scenario. Stocks gaps down due to bad earnings or after-market news. Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on. If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads). So your two choices are to accept a loss greater than 20% to close the position and stop the bleeding OR to be stuck with the position. It's NOT the same dynamic as owning the underlying stock. Say MSFT is at 140 and I sell strikes at 115 collecting premiums. If MSFT happens to gap down and I get assigned shares bi deal. I have more leverage with my shares than the guy who bought shares at 140 and is now holding the bag. If MSFT bottoms out there I can now sell covered calls and still profit off my cost basis or simply hold long term. But if you bought at 140 you’re going to be taking a loss until it’s back to your cost basis. I don’t see the risk. If MSFT drops 20% I’m buying anyways. I’m collecting premiums up front so really the only thing to keep this stars they going is to not get assigned (which isn’t bad) plus if I buy an OTM put at say 110 and structure the ratio of buy to sell 2:1 I’m only going to lose money on in the range 110-115. Anything below that is a profit and anything above 115 is a profit of premiums. These are just rough numbers. I must not be very good at communicating the nuance of the position. Selling puts is a grand strategy. I do it myself. Selling puts on positions you don't mind owning is a grand strategy. I do it myself. My argument has been: 1) Selling puts is NOT equivalent to owning the stock in most circumstances 2) Selling puts has its own unique challenges - particularly with position management when the underlying has steep losses AFTER selling the put and/or if your underlying investment thesis changes and you need to get out of the position I'm simply cautioning people from believing that selling puts or going long calls is the same as equivalent to owning the underlying because the economics are very different all the way up to the contract's maturity. This will be my last post on this because if that doesn't successfully communicate my points, or people still disagree, then we're just at an impasse.

+1000. Im pretty close to convincing myself to move on from this trade, because of this reason. I think it would be a mistake at this juncture. We've all waited YEARS for positive developments. We're getting them - but slowly. Sure, sunk cost fallacy, but I haven't sat around for 5 years to give up at the point the finish line is in sight just because it's taking a little longer than hoped.

For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure. Well yes, that is what I characterized as being stuck in the position. The capital is tied up until expiry OR you lock in a loss greater than the common stock. If you're only selling 1 month puts, being locked up isn't a big deal, but your premiums are tiny, transaction costs eat most of it, and you can expect these things to move against you more frequently. If you sell them further out, much more opportunity to make greater premiums, less frequency of a negative outcome if held until maturity, but ALSO tying up capital when you're wrong OR taking greater losses than in the common. It's not the same thing as stock ownership and comes with its own set of psychological barriers/problems/biases to work through. I personally like options, but they're not easy and certainly not a substitute for outright stock exposure IMO. Again, I'm not denying the risk. But I think you're overstating it. MSFT has better premiums doing it weekly than it does monthly. Also avoiding earnings weeks can help reduce risk. Plus if you're really worried about a 20% drop you can offset premiums buy buying a few OTM puts. edit: And you could get whipsawed on that hedge put. So it doesn't completely negate risk. The aggregate of shorter term premiums typically exceeds long term premiums. (I.e. selling 4 1-week puts would generate more premiums than a 1- month put), but that excludes transaction costs (which aren't insignificant for options and you have 4x as many) and means you'll be assigned shares more frequently because your options have to be near-the-money to make anything. I just think it's a false equivalence to say they're the same just because they are IF you hold to maturity. IF the thesis changes in the underlying, you don't have that luxury and paid a massive penalty for it. The only times options are a decent proxy for the underlying is when you have a long time frame (I e. LEAPS) and are massively in the money so the vol premium is near zero and your delta is 1. I do this all the time in my IRA to get leverage, but it's going long deep-in-the-money calls with 15-18 month expiries. You could do the same selling deep-in-the-money puts and watch the premium erode while the stock rises in value, but this basically ties up the same capital as owning the underlying.

For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure. Well yes, that is what I characterized as being stuck in the position. The capital is tied up until expiry OR you lock in a loss greater than the common stock. If you're only selling 1 month puts, being locked up isn't a big deal, but your premiums are tiny, transaction costs eat most of it, and you can expect these things to move against you more frequently. If you sell them further out, much more opportunity to make greater premiums, less frequency of a negative outcome if held until maturity, but ALSO tying up capital when you're wrong OR taking greater losses than in the common. It's not the same thing as stock ownership and comes with its own set of psychological barriers/problems/biases to work through. I personally like options, but they're not easy and certainly not a substitute for outright stock exposure IMO.

The writing of puts takes very little effort on blue chip stocks especially if you're not greedy about premiums and go decently out to 95%+ profitability range. I just don't see how this is anymore risky than owning the underlying stock. As Greg pointed out. Value investors are just as likely to hold BAC on the way to zero as someone who would write puts for premiums with the risk of potentially getting assigned. Now if you do this on say Beyond Meat yeah you're a moron. But doing this on SPY or other securities you would hold long-term, I don't see the risk. Maybe I'm missing something....the majority of you on here are much better investors than myself. How many of you would liquidate a portfolio of $SPY if it dropped 15% in a day? If this were to happen the person who got assigned shares now has the advantage vs the person who is holding. I could write covered calls and collect premiums while you have to hold until SPY climbs back to your dca before you could sell or write covered calls. Think about worst case scenario. Stocks gaps down due to bad earnings or after-market news. Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on. If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads). So your two choices are to accept a loss greater than 20% to close the position and stop the bleeding OR to be stuck with the position. It's NOT the same dynamic as owning the underlying stock.

Have been doing something similar myself, bit it's based entirely on "when markets do well, Trump has enough flexibility to hang himself with it". As long as that dynamic holds, this trade will be profitable. But hard to know when he finally decides to let things ride OR isn't going to save the market by backing down.

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though. Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe. Although I haven't been doing it strictly on BAC. I do it all the time with BRKB, WFC, BAC, and AMGN when AMGN 170-puts have sufficient premium. It's interesting to think about this at scale and why people choose to not do it. I mean if you had say 500k you could basically generate a 50-60k yearly income off this strategy with minimal risk. I mean even with say weekly SPY 280 puts (86% profit chance) you generate a $94 premium. Just say 25% for taxes so a 70.5 premium. You could do about 18 contracts a week and generate about 5k a month in income. Yeah you would get the shaft if the market tanked, but that would happen to your retirement accounts regardless. Why is this? Because the risk you're taking is many hundreds of thousands of dollars when it doesn't work out. You're selling insurance for a premium - it's great when the insurance doesn't have to pay, but a doozy when it does. As far as the strategy, I trade around my core positions ALL of the time. Take gains here, average down there, roll back. Also, I sell long-dated out-of-the money calls and tend to repurchase most of them on market dips 5-10% for 50-60% less, wait for the recovery, and rinse/repeat. All of these strategies take advantage of volatility - but they all suck-hard when they go wrong or you get whipsawed. The buying/selling the actual shares around a core position is probably the least risky, but also the least rewarding/leveraged. As LC said, works best when done on a portfolio of multiple securities you're already comfortable holding and low commission accounts.

Out of those five items, only really the macro calls affected performance. Their equity positions overall have done reasonably well since 2008, excluding the puts and derivatives. That's what really killed about $2B in gains. As for the Watsa family involvement, Ben has only been involved for the last 3 years, while Christine has been involved for one year...are you going to tell me that was the reason Fairfax underperformed for the last decade? Fairfax is not buying the market...be it value or growth. So that's not an excuse, nor the reason why it underperformed. We all know clearly from the letters that the macro calls since after 2009 offset about $2B in gains. And that extremely conservative position left them holding a ton of cash and a ton of bonds, when equities were priced at 50 year lows. So if shareholders want to blame anything, I would say they should be blaming the macro calls on what might happen. - Going back to shareholders holding the stock or considering buying...if you think that Fairfax has learned their lesson on macro calls, Fairfax will probably do well in the future. - If you think that Fairfax will continue to try and make these macro bets, then yes, it is possible Fairfax will be out of step. I personally am betting on the former, but at the same time, I manage a considerable amount of my own portfolio and only a portion is in Fairfax. Cheers! I'm not convinced they have learned. It was only 3 years ago that they dumped 100% of their long bond portfolio in response to Trump winning the election. It was a smart move in the short term, but they failed to start re-adding to that position and have now missed out on additional gains from the duration rally while being stuck in short-bonds while we cut rates. Macro calls will continue. Sometimes they'll be right. Sometimes they'll be wrong. They need to get better about the risk management when the latter occurs.

Have been buying & selling over the last 2-3 weeks. Typically 20-30% of the position. When VIX dropped to 15-17 I was buying and selling those same contracts each time it went to 20+. Entire position has basically been paid for in profits at this point and I purchased more today. Sold ~15% of the core put position today when VIX hit 20. Will probably let a bit more go if me move closer to 25, but still waiting for that elusive 30+ print on the VIX to signal panic to let the bulk of the position go.

This has been my take. No, I haven't "ignored" it, but I have ignored it and not clicked into the bulk of the topics. Why do I need to remove them from view if I can simply choose not to be baited into clicking on it?

I feel the same as I did back in May, though probably leaning a hair more towards adding

Fixed! Lol I tend to agree with Parsad to the extent the price point is attractive and they don't need to knock the lights out on investments to do well from here. But where I consistently have a hard time is that I don't see how Fairfax does a consistent 4% going in the near-to-midterm. Sure, they may get a nice one-off investment that boosts results in a year - but historically much of that has been given back the next year (see Blackberry and Eurobank) or is obviously not repeated annually. A consistent 4% is going to be hard to achieve with their stock-bond mix and a portfolio of cyclicals with interest rates at 1.6%. I still think the price needs to go lower, or rates higher, for Fairfax to make sense at this time. Either that, or a market crash where I can have some certainty that cash can be out to work at greater than a 4% expected return.

I joined the Bitcoin wagon. Only 0.5% of my investible assets at this point, but would agree that I have misunderstood the opportunity for the past 6 years since following as far back as 2012/3013. Could've been rich :(

I definitely take what they say with a large grain of salt, but if you ignore all of the paranoia they do identify a lot of this stuff LONG before it hits the mainstream media. They talked about this issue in the funding markets days, if not weeks, before the spikes in rates occurred. The identitified the dollar funding issues that roiled markets back in 2015 before it was mainstream and identified the JPMorgan whale and the massive pricing defects in the CDX market being caused by him like a month or two before the trade blew up and put a multi billion dollar hole in JPMs balance sheet that year. For getting first access to these stories the site is interesting and unique AND a welcome refrain from the "this time is different" that you see before every major crisis in the mainstream media. But Zerohedge has called 10 of the last 1 recessions.

So I...nailed it? Will never happen again 8)

You'd think. Yet the preferreds fall every day. Just rotation to commons? Im honestly perplexed to a degree also. Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling. Personally I was disappointed that even if NWS ends, the capital retained will simply be added to the senior liquidation preference. In essence, all 100% still flows to the Treasury likely for the next couple of years. This combined with the capital raise plans being deferred to after the election is disappointing. I had loaded up my position to 20% of portfolio after Calabria's statements in the early summer about capital building and shareholders getting some conversion, but after this information have cut it down to 5% again. Surprised no one else is bothered about continued usurping of profits despite the court ruling. It's not ideal, but also can't last. Common shareholder's are NEVER going to give company new money if retained earnings simply increase government's ownership. So we know this will be ended before a capital raise. Secondly, we know that litigation needs to be settled - which it won't be - if the Treasury keeps all $ past the 10% moment AND continues to usurp the value of all future retained earnings. This won't stand - how it gets nullified/reversed is uncertain - but it will be nullified/reversed if we're to do a successful capital raise and we know that is the administration's goal. This is definitely a situation where I'd say uncertainty =/= risk.

The problem with that is, it's not possible if the market isn't doing the same. There's a trade-off between driving the CR down to compensate for low returns on investments, and shrinking your book to the point where you effectively liquidate your franchise. Up to a point, underwriting discipline drives better ROEs; beyond that point, if the market is happy to accept lower ROEs then FFH has to as well. Agreed. We haven't seen a shake-out in the secondary capital being provided for insurance-linked contracts. The demand for these likely has little correlation with interest rates because these investors are simply looking for an uncorrelated return. If interested rates are zero, alternatives investors don't need CRs to go 80. They simply need a reasonably positive, uncorrelated return (i.e. loss ratios less than premiums received - this could be a CR of 95). It's hard for me to envision a prolonged hardening of the market until we see a shake-out event in the alternative capital. The leverage comment is what everyone who is getting on FFH is currently depending on. Can they consistently produce 3-5% returns that are leveraged to a decent overall ROE - but with interest rates at 1.8%...even this will be difficult.

I'm most apt to believe it's the higher capital requirements paired with Fed shrinking it's balance sheet/liquidity has is the main culprit behind the reduced dollar liquidity, but that's probably not the cause of the spikes, just what is making the spikes possible. I've heard the tax payments which makes some sense (removes available cash supply), but also that also a ton of financial institutionals putting on steepeners (short 10-year, long 4x 2-year) in the markets where they long-side is typically funded with repo demand (increase in demand). Lastly, Zerohedge has also partly placed blame on dealer Treasury inventory as they can't seem to unload them (to replenish cash), but the Treasury keeps running massive deficits/issuance tying up more and more dealer cash - once again, removing supply of cash from repo market. So you have multiple factors reducing cash supply and/or increasing repo demand. None of this is caused by reserve reduction/CB balance sheet reduction, but the reduced level of reserves is what is allowing these smaller factors to have a larger impact. Not sure I understand all of this myself, but have been reading everything to learn

My response to the low ROE estimate is not that markets have lost faith in FFH (been a long time since they've had it), but that the bulk of FFH's portfolio is invested in things that are earning significantly below your 5.3% hurdle (and even lower than the 4.8% that you calculate the market pricing in). With leverage, maybe 4.8% discount is appropriate, but I think we can go lower if interest rates continue to move the wrong direction. We will see positive bumps along the way, but FFH will not re-rate until interest rates rise to a much higher level - sustainably. That being said, 0.95x book is probably not a terrible price to pay while we wait for that to happen, but methinks we haven't seen the lows yet.

More concerning for bond longs, but not so much for the Fed yet I don't think. I imagine that much like employment, inflation is a trailing indicator that always appears at it's "best" prior to a downturn - we'd need to see a sustained rise before it becomes an issue. Not just a few months worth. Also, I have to believe the tarriffs are a portion of that meaning it's transitory and potentially reversible and not emblematic of an elevated trend in inflation.

Not all today - but over the past few weeks have added to NLY and ZG. Added tiny allocations to NMM and SBLK to benefit from the easing of trade tensions. Also, re-established my entire put position on the S&P today now that VIX is back down to ~13

It's important, imo, that if things do ever reach settlement discussions, that the plaintiffs resist any potential urge for excess greed. Agreed, but keep in mind 150% is what they're asking at the start. Not likely to be the minimum they'd settle for. At some point, now that we have a court that agrees that the NWS was illegal, there needs to be compensation for unpaid dividends that very-well could have been paid if the govt hadn't stolen the funds. We're never going to be made entirely whole if you want this to happen quickly, but I have a hard time characterizing asking for what you're owed as being greedy. Methinks this gets settled somewhere between 100-125% of par and we move forward with the remainder coming out in a favorable conversion ratio into common as part of the recap. This form of relief seems to be something that has just came up very recently. Is this/has this been documented anywhere? I'm all for whatever they can get but where does the 150% come from? When would the preferred have been able to pay a dividend? Not until after the 10% moment and company recapped right? I dont think you can look at the funds just paid over 10% as divs would not have been paid out while still in conservatorship? The immediately blowback you would get with what you suggest (and Im all preferred so Im all for it) is that your screwing the common. They will not want to hear the divs would have been paid if recapped and money not taken but its true. When they would have left conservatorship is really the question then. Is the 150% coming from total par value of all jr preferred plus some of the 25B that would be returned via a tax credit? Totally - I'm not certain of the 150% calculation either, but it's probably NOT the amount in excess of 10% moment. The argument likely is that if net worth/profits WEREN'T unconditionally swept @ 100%, there was enough money in many years following 2012 to have been able to have paid the 10% coupon to the govt and the divvy on preferreds AND have retained some earnings for capital building. My guess is the missed dividends for the past 7 years is how they get near the 150% mark. It could also be a small adjustment to what the value of these securities would trade foe today IF they were paying a divvy while the 10 year Treasury is at 1.5% as many of these instruments would trade at a premium to par. Contractually the preferreds are owed a MINIMUM of par. I don't think it's greedy to try to negotiate for more than that if you can make the case dividends could've been paid if not for the government's illegal actions. Further - this isn't a new idea. This has been mentioned as far back as 2013 when I first started following the investments. It seemed less and less likely with courts ruling against shareholder's, but having a court say the NWS was inappropriate reopens the argument dividend could have been paid but for the inappropriate NWS. 150% is not my base case, but I don't fault them for trying on my behalf to get more as I believe it is a pretty reasonable case to make.

It's important, imo, that if things do ever reach settlement discussions, that the plaintiffs resist any potential urge for excess greed. Agreed, but keep in mind 150% is what they're asking at the start. Not likely to be the minimum they'd settle for. At some point, now that we have a court that agrees that the NWS was illegal, there needs to be compensation for unpaid dividends that very-well could have been paid if the govt hadn't stolen the funds. We're never going to be made entirely whole if you want this to happen quickly, but I have a hard time characterizing asking for what you're owed as being greedy. Methinks this gets settled somewhere between 100-125% of par and we move forward with the remainder coming out in a favorable conversion ratio into common as part of the recap.

There it is! FMCCJ up 26% so far

Doesn't this do A LOT more for the commons than the preferred at this point? The preferred are good for par - we know that now that the NWS will be stopped. But if the NWS was illegal and a settlement would return some of those proceeds back, that means less dilution to the common as those billions come back as capital.