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For those that think ORH buyout is imminent...


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Buy Nov. 45 calls sell Nov 50 Calls.  I did this morning for $2.8 each net.  Will payoff $5 if ORH is over $50 by November 20 (78% return).  Will break even as long as ORH is at $47.8 by Nov 20.

 

You are going to lose 100% if the stock closes at $45.

 

Instead you could buy the Feb $40 for $10 and only lose 50% if the stock is at $45.

 

And gain 72% if buyout at 1.1x, or 98% if the buyout happens at 1.15x book, or 167% if it happens at 1.3x book.

 

I see more downside protection while at the same time more potential upside.

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Anyhow, I'm not leveraged in my ORH position.

 

I don't believe in the buyout enough to do that.

 

I'm curious though why you wrote the $50 strike calls -- if you are bullish enough to risk losing 100% at $45, why did you write the covered calls at $50 strike?  Buyout is going to be for at least a 1.1x book multiple, IMO.  Under 1.1x book, your move hurts yourself.  Under 1.2x or 1.3x, serious impairment occurs.  Risking 100% for a max 78% return just seems not the best idea.

 

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I wrote the $50's for protection in case the buyout doesn't happen by nov, I still think it will be @ 50 by then.  So if it is at $50 and the buyout has still not occurred, I will make the profit and can take the proceeds and reinvest into new options (rather than locking capital into feb's).

 

I looked at buying deeper in the money calls as you are saying, but thought it tied up too much capital, and there is more downside risk if something like Katrina happens. 

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I wrote the $50's for protection in case the buyout doesn't happen by nov, I still think it will be @ 50 by then.  So if it is at $50 and the buyout has still not occurred, I will make the profit and can take the proceeds and reinvest into new options (rather than locking capital into feb's).

 

I looked at buying deeper in the money calls as you are saying, but thought it tied up too much capital, and there is more downside risk if something like Katrina happens. 

 

 

The amount of capital being tied up doesn't matter.  78% return on every dollar invested is all that matters.

 

Katrina will wipe you out 100% -- really believe stock will hold above $45 if Katrina happens?  Really??

 

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Heres how I look at it.  Under my base-case scenario, the $40 call returns 0%, vs 78%.  I feel $50 is a pretty reasonable base-case assumption given its been trading slightly less than book lately, and book at Q3 will probably be $54 +/- 1.

 

 

                             ORH              $40 call             $45/$50 Spread

Catastrophe              $40              -100% return     -100% return

base                        $50               0% return            78% return

Buyout                     $57               70% return          78% return

High-multiple buyout   $65               150% return         78% return

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Heres how I look at it.  Under my base-case scenario, the $40 call returns 0%, vs 78%.  I feel $50 is a pretty reasonable base-case assumption given its been trading slightly less than book lately, and book at Q3 will probably be $54 +/- 1.

 

 

                             ORH              $40 call             $45/$50 Spread

Catastrophe              $40              -100% return     -100% return

base                        $50               0% return            78% return

Buyout                     $57               70% return          78% return

High-multiple buyout   $65               150% return         78% return

 

 

Catastrophe -- I suppose in that category one can include 20% pullback in the stock markets.  That's not a terribly unlikely outcome IMO, and might easily wipe out the $40 call too, however that call doesn't expire until Feb.  Personally, I'm in the $40 strike Feb call, but I can afford delivery on 100% of the shares without getting into leverage -- so really I've bought a put at $40 so that I can go 100% net worth notional into the trade without catastrophic risk of loss.

 

However,  philosophically I think we need to separate out buyout from non-buyout.

 

In the non-buyout case, I think your position is far too risky.  You wouldn't normally be risking 100% loss from merely a 10% 3 month stock price pullback would you?  Okay then, you would only do this for the buyout scenario -- then in that case, I think the $50 call you wrote weakens your trade.  You seem to be making yourself feel more comfortable about your downside, and in the process severely capping your upside if your thesis works out, yet your downside doesn't look safe to me at all.

 

Anyhow, that's what I think.  I'm only being critical because 1) I think you should rethink this and 2) you are advocating it to others

 

 

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Too late to rethink - already executed :)

 

I know what you're saying in terms of a 10% pullback wiping out the entire position - I certainly would expect anyone to put a substantial amount of their net worth in to this.  For me, I have a small position in it, and if ORH declined lower than $45 due merely to a stock market pull back I would back up the truck.

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  • 1 month later...

Ericopoly:

 

As with a couple of years ago (on the '08 FFH 150 calls at <=$2 when shares were trading at <$100) ... have to commend (and thank) you for sharing your strategy with ORH ... I pursued similar, and it's worked out well with recent events ... so if I'm in Seattle area anytime soon, I'll need to get you a Sanjeev-style lunch.

 

Now am looking for the next unpolished gem ... can't cycle thru ORH, NB, FFH anymore to see which is the more undervalued! With the recent market bounce, maybe it's just good to do nothing for a while ... although am currently playing a bit the commodity contrarian with positions in SFK.UN/SFK.DB (pulp) and PEY.UN (natural gas), and some Alcoa (aluminium) Jan '11 options

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Ericopoly:

 

As with a couple of years ago (on the '08 FFH 150 calls at <=$2 when shares were trading at <$100) ... have to commend (and thank) you for sharing your strategy with ORH ... I pursued similar, and it's worked out well with recent events ... so if I'm in Seattle area anytime soon, I'll need to get you a Sanjeev-style lunch.

 

Now am looking for the next unpolished gem ... can't cycle thru ORH, NB, FFH anymore to see which is the more undervalued! With the recent market bounce, maybe it's just good to do nothing for a while ... although am currently playing a bit the commodity contrarian with positions in SFK.UN/SFK.DB (pulp) and PEY.UN (natural gas), and some Alcoa (aluminium) Jan '11 options

 

 

Hey I'm up for lunch anytime.

 

Belatedly (never got a chance to implement it) I had an idea of going 2x long ORH in my IRA accounts and then to short FFH in my brokerage account (in an amount exactly 1/2 of the ORH position).  I figured I would be building up a loss on the FFH position that would be useful for tax purposes, yet on a total net worth basis would not be suffering real losses.  But I never did attempt to follow the strategy (only thought of it a month or so ago).  Like the cycling through ORH, NB, FFH, this idea is now meaningless too.

 

 

 

 

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Ericopoly:

 

Now am looking for the next unpolished gem ... can't cycle thru ORH, NB, FFH anymore to see which is the more undervalued! With the recent market bounce, maybe it's just good to do nothing for a while ...

 

If misery loves company. Im with ya on that one!

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