Event Driven Options - LEAPS

[DRValue]

Not sure where to post this, as can apply to Strategies, General and Investment Ideas so we'll start here...

 

I've been looking for a while for event driven options trades with a high return in the vein of Cornwall Capital.

 

I cannot believe I missed Put LEAPS on SVXY. It was obvious equity vol would increase.

 

Is there a board for Event Driven LEAPS? Wheres the best place for it so it gets high visibility? Any new ideas out there? There must be something we can find. Knowing something is out there but I cant find it is disheartening...

 

[Guest MarkS]

You can always take a look at some mergers with hair on them.  For example, you could look at Qualcomm.  There is a $79 bid for the company on the table - but Qualcomm management has been fighting it pretty hard.

 

Thanks

Mark

 

 

[DRValue]

I'll take a look.

 

I had some success in the past with some Deutsche Bank and Genworth Financial LEAPS.

 

Not sure what  to think of Genworth at the moment as I was expecting a bidding war in the past due to the low P/B but it never materialized. I feel like the management know the books are cooked so they're saying that $5.43 is the best option for shareholders even though Book is so much higher. I know its got issues, but they can't be that bad.

[Pelagic]

When you're looking at event driven LEAPS, I assume options IV is high due to the range of outcomes surrounding the LEAP. Where in the option chain do you usually look to buy? In/at/out of the money. Just curious as I know some people prefer deep ITM to reduce the vol premium whereas others go for at or out simply because they're cheaper. It's an interesting strategy.

 

I know TD's Think or Swim Platform (its free and awesome if you trade options) has a function to view what the market is projecting as a 1 standard deviation move over the life of the option which can lead to curious predictions for events.

[RichardGibbons]

I don't think that the SVXY volatility options were nearly as obvious a bet as you think.  They are hugely path-dependent. In other words, if implied volatility goes from 10 to 30 in 10 days, it's a very different outcome for SVXY than if it goes from 10 to 30 in one day (like the difference between SVXY falling to 90 and SVXY falling to 12).

 

In fact, I think that the only reason SVXY is trading around 12 now is because hedge funds manipulated the VIX futures to ensure that on the one bad day, SVXY would fall to 15 rather than 60 (immediately after the market closed--in the 15 minutes before SVXY was valued--the VIX futures spiked to 37, and then immediately fell back to the high 20s, basically ensuring that SVXY would do far worse than it would've done if it were priced when the market closed).

 

What's more, when you're holding the SVXY puts, you're not just suffering time decay on the options, but dealing with the growth in SVXY itself as a result of the contango in the futures.  So, I think leap puts on SVXY was not at all an obvious bet.

[siddharth18]

I don't think that the SVXY volatility options were nearly as obvious a bet as you think.  They are hugely path-dependent. In other words, if implied volatility goes from 10 to 30 in 10 days, it's a very different outcome for SVXY than if it goes from 10 to 30 in one day (like the difference between SVXY falling to 90 and SVXY falling to 12).

 

In fact, I think that the only reason SVXY is trading around 12 now is because hedge funds manipulated the VIX futures to ensure that on the one bad day, SVXY would fall to 15 rather than 60 (immediately after the market closed--in the 15 minutes before SVXY was valued--the VIX futures spiked to 37, and then immediately fell back to the high 20s, basically ensuring that SVXY would do far worse than it would've done if it were priced when the market closed).

 

What's more, when you're holding the SVXY puts, you're not just suffering time decay on the options, but dealing with the growth in SVXY itself as a result of the contango in the futures.  So, I think leap puts on SVXY was not at all an obvious bet.

 

Do you have any thoughts on deep out of the money 2020 UVXY puts?

[RichardGibbons]

Do you have any thoughts on deep out of the money 2020 UVXY puts?

 

I've bought leap puts on UVXY in the past, though mostly just out of the money, and typically, after paying for the spread, have made small returns. In general, I haven't done deep out of the money UVXY puts because when I do the math it doesn't seem like they will pay off very much (but I haven't looked at it in years).

 

I think that you can probably win with them, but closing them could be a challenge.  The problem is, if you close them early, then you don't get the full impact of the contango and the spreads can be high, both of which impact your returns.  If you close them late, you're risking a 100% loss if the market moves against you near expiration.

 

So, historically, I concluded that it was probably profitable, but not worth the effort and the taxes.  If you try it (or even model it), and find different results today, I'd be interested in hearing about that.  Keep in mind that we've just finished one of the most low-volatility run-ups in history, so it's a bad idea modelling the decay of UVXY based exclusively on that. Though having volatile volatility is actually good for a short UVXY position, I suppose.  With higher volatility of volatility, you might get lower gains from contango, but more gains from losses in UVXY due to fluctuations in a leveraged ETF.

 

(It's also worth noting that I've owned large positions in SVXY in the past, but ditched them when the VIX fell super low, and I realized that there was a real possibility of a 100% loss on a volatility spike.)

[DRValue]

When you're looking at event driven LEAPS, I assume options IV is high due to the range of outcomes surrounding the LEAP. Where in the option chain do you usually look to buy? In/at/out of the money. Just curious as I know some people prefer deep ITM to reduce the vol premium whereas others go for at or out simply because they're cheaper. It's an interesting strategy.

 

I know TD's Think or Swim Platform (its free and awesome if you trade options) has a function to view what the market is projecting as a 1 standard deviation move over the life of the option which can lead to curious predictions for events.

 

So generally I'm looking for an asymmetric risk/return profile which will mean deep out the money low price options.

Event-wise it could be a market correction, financial restatements (capital one) or some other event mis-priced with a LEAP date far enough in the future to allow the thesie to play out.

Think of Ackman's HLF puts for his short, which I believe he has now closed and given up on.

 

[DRValue]

I don't think that the SVXY volatility options were nearly as obvious a bet as you think.  They are hugely path-dependent. In other words, if implied volatility goes from 10 to 30 in 10 days, it's a very different outcome for SVXY than if it goes from 10 to 30 in one day (like the difference between SVXY falling to 90 and SVXY falling to 12).

 

In fact, I think that the only reason SVXY is trading around 12 now is because hedge funds manipulated the VIX futures to ensure that on the one bad day, SVXY would fall to 15 rather than 60 (immediately after the market closed--in the 15 minutes before SVXY was valued--the VIX futures spiked to 37, and then immediately fell back to the high 20s, basically ensuring that SVXY would do far worse than it would've done if it were priced when the market closed).

 

What's more, when you're holding the SVXY puts, you're not just suffering time decay on the options, but dealing with the growth in SVXY itself as a result of the contango in the futures.  So, I think leap puts on SVXY was not at all an obvious bet.

 

I think you could be right here. I'm probably suffering a little from hindsight confirmation bias. Basically I was reading how low volatility had been, how low the vix was, how the Dow had continuous monthly gains (something like 13 months straight? maybe more?), and looking at SVXY having some huge swings in value.

 

In hindsight that'd be something that should of screamed to me to take a look at, but as you suggested it doesn't mean that I'd have made the decision buy some puts based on the data. Unfortunately, I didn't even get to the point of analysis before the event and don't have access to historical data. But that's the sort of event I'm looking for.

[nickenumbers]

• Outstanding question Dr. Value! We are putting the nerd meter into the red with this one, and I LOVE IT!  ;D
   
  There are some Genius investors on COBF that are going to add more than me on this topic, but.... 
   
  Event Driven LEAPS are one of my favorites and secret weapons.  I think of them and use them as you have described.
   
  I keep my eye open for an asymmetric risk/return reaction to a situation, story, event, etc.  Lets say that Amazon buys Wholefoods, and Costco goes down by some silly stupid number over a couple of weeks.  The size and scope of the reaction just doesn't make sense to me (fish in barrel + water level going down), so I will buy:
   
   
  
  • 12 or 18 month COSTCO LEAP
    
  • Out of the money with a strike price say 5% or maybe 10% higher than the present depressed price
    
    • And I might allocate 1/2% of my portfolio, maybe 1%
      
    • Plus when the tide is coming in [growing GDP/economy] you have an added sweetner of maybe a 4% price appreciation, independent of the event.

     

     

    I have used the strategy with Puts also with a company like TESLA when it is at a high, and it has worked, but with less return..  And it doesn't feel as comfortable to me..  Betting on long term growth is easier for me to calculate than the top side of a stock.

     

    But, I have learned with Long Term LEAPS to reach for them very very slowly.  They have to be a high probability fit..  Don't be a "man with a hammer."

     

[Pelagic]

When you're looking at event driven LEAPS, I assume options IV is high due to the range of outcomes surrounding the LEAP. Where in the option chain do you usually look to buy? In/at/out of the money. Just curious as I know some people prefer deep ITM to reduce the vol premium whereas others go for at or out simply because they're cheaper. It's an interesting strategy.

 

I know TD's Think or Swim Platform (its free and awesome if you trade options) has a function to view what the market is projecting as a 1 standard deviation move over the life of the option which can lead to curious predictions for events.

 

So generally I'm looking for an asymmetric risk/return profile which will mean deep out the money low price options.

Event-wise it could be a market correction, financial restatements (capital one) or some other event mis-priced with a LEAP date far enough in the future to allow the thesie to play out.

Think of Ackman's HLF puts for his short, which I believe he has now closed and given up on.

 

Thanks for the explanation. That's where I've tended to look as well.

 

A thread dedicated to potential opportunities in this space might be useful, something like the "What are you buying today" thread but for LEAPS.

 

Nickenumbers point in regards to economic tailwinds boosting share price independent of events is well taken. Options volatility and its component of their price tends to be heavily weighted toward current sentiment however, what's happening today might be just a footnote 10 months down the road. Fascinating topic - thanks for starting the discussion.

[bizaro86]

How did the Costco trade work out for you? I bought a relatively large COST stock position during the event you mention (also Target). I've sold Target and am keeping Costco. I've been pretty happy with the results, but am curious what type of returns you got on the LEAPs.

 

My biggest concern is that felt like a pretty low downside trade to me, so I put it on in size. I would have sized it smaller with options, and wonder if I'd end up making less money ...

[DRValue]

Cheers.

 

All thanks owed to "The Big Short" and Cornwall Capital. The strategy makes absolute sense to me. Personally I don't see the point in risking any money on stocks or any instrument unless you're potentially doubling it or more. There is just so much that can go wrong, even if you're right the market may not think so. So if I can potentially risk a small amount of capital for 30x returns on a binary, time constrained event then I'd be willing to do it. Trouble is, legitimate opportunities are few and far between.

Also, if you'e LEAPS are far out enough you could be wrong and still recoup some of your losses if you can sell your options with some residual value.

 

Are you familiar with Capital One and Cornwall Capital? I've assusmed the board would be.

 

 

[DRValue]

• Outstanding question Dr. Value! We are putting the nerd meter into the red with this one, and I LOVE IT!  ;D
   
  There are some Genius investors on COBF that are going to add more than me on this topic, but.... 
   
  Event Driven LEAPS are one of my favorites and secret weapons.  I think of them and use them as you have described.
   
  I keep my eye open for an asymmetric risk/return reaction to a situation, story, event, etc.  Lets say that Amazon buys Wholefoods, and Costco goes down by some silly stupid number over a couple of weeks.  The size and scope of the reaction just doesn't make sense to me (fish in barrel + water level going down), so I will buy:
   
   
  
  • 12 or 18 month COSTCO LEAP
    
  • Out of the money with a strike price say 5% or maybe 10% higher than the present depressed price
    
    • And I might allocate 1/2% of my portfolio, maybe 1%
      
    • Plus when the tide is coming in [growing GDP/economy] you have an added sweetner of maybe a 4% price appreciation, independent of the event.

     

     

    I have used the strategy with Puts also with a company like TESLA when it is at a high, and it has worked, but with less return..  And it doesn't feel as comfortable to me..  Betting on long term growth is easier for me to calculate than the top side of a stock.

     

    But, I have learned with Long Term LEAPS to reach for them very very slowly.  They have to be a high probability fit..  Don't be a "man with a hammer."

     

 

:) Nerd mode is on when talking money. Best and only way!

 

Did Costco work out ok?

 

If you do have some ideas please share and I'll be sure to do the same. Any ideas about where we can go to find these gems in terms of research or other money manager ideas?

[nickenumbers]

Fun discussion.  Really hard to find and have enough conviction to pull the trigger on it.  I hear Charlie Munger in my ear "If it is close, we don't buy.  It has to be a no brainer."

 

I bought COSTCO 6/2018, $170 LEAPS at a couple different points late June 2017, Early July, then again in Early October.  I sold it all out at the end of November 2017.

 

I made an average of about 78% on my capital, straight up.  If you annualize it would be around 185% (but I don't get too impressed with an annualized number.)

 

 

Now, life can be viewed in hindsight, and I should have done a larger position, OF COURSE!  But, I continue to learn, and risk control myself.  It wasn't a sure thing SMACK BANG, it was just a high conviction, high probability calculation.

 

 

I made 54% on Tesla $315 put options, but that was a long, ugly bumpy ride, that was negative for a long time.  It was a small position and I thought I was going to sell it out at a loss.  But, I learned that I can be right over the long term (5-10 year opinion on Electric Vehicles), BUT option basics- you gotta be right within the time period of your option....  Tesla tanked AGAIN, and I sold quick and ran to the exit.

 

Who has something cool that they are considering and has a good narrative around?

 

One of the beauties of the option is the magnified return, but it is pretty far out on the risk spectrum vs. a buy and hold on a stock.

[nickenumbers]

How do you go long on Bitcoin?  I am not a Crypto fan, at all.  I am just an observer.

 

Can you buy a 12 or 18 month Leap on Bitcoin with a TD Account?

 

[theozmancometh]

(I'm new here, don't bite :P)..

 

DrValue is talking about a very specific type of LEAP trade mentioned in the Big Short, which was super asymmetric. If my memory serves me correctly, Capital One had some issue (2003ish), the market totally tanked the stock over the issue, they did a ton of research and didn't think it made sense, and decided to act accordingly. It was a binary bet, either the stock would go to near nothing or go back to near normal values. The extra thing is that the LEAPs may have been mispriced as well, which made it almost a sucker's bet in their favor.

 

I don't even know if trades like that come around every year:)

[DRValue]

@theozmancometh

 

You're not wrong!

The amount of "opportunities" I see that turn out to not be opportunities is frustrating.

 

I think i would be lucky to find even one investment a year with the certainty and risk return profile I'm looking for. The research would be immense too.

 

Maybe a group of dedicated individuals could pick an area each to look at and report back. Who knows?

[DRValue]

How do you go long on Bitcoin?  I am not a Crypto fan, at all.  I am just an observer.

 

Can you buy a 12 or 18 month Leap on Bitcoin with a TD Account?

 

Going long you can buy them on an exchange or through some trading accounts.

 

No idea personally on leaps but a quick Google brought this up

 

www.coindesk.com/first-long-term-ledgerx-bitcoin-option-pegs-price-10000-one-year/amp/

[theozmancometh]

@theozmancometh

 

You're not wrong!

The amount of "opportunities" I see that turn out to not be opportunities is frustrating.

 

I think i would be lucky to find even one investment a year with the certainty and risk return profile I'm looking for. The research would be immense too.

 

Maybe a group of dedicated individuals could pick an area each to look at and report back. Who knows?

 

Well the classical example you gave is Cornwall's trade.. But if you read the interview they do in Hedge Fund Wizards, they talk about other asymmetric type trades (Korea or perhaps shipping volume), they didn't use LEAPs to do that trade.. In other words, LEAPs are a means to an end. You're not looking for mispriced LEAPs, you're looking for mispriced asymmetric trades with low downside and high upside, so that if you take 10 of them, you only need 1 or 2 to work to make a  lot of money. That's the thesis of their fund (or was), I'm not sure what they do now.

[DRValue]

Yeah, I'm mainly focused on leaps as I know they're available to retail investors I think I'd struggle for access to anything more exotic.

They're obviously some special people with the amount of research they can do and the ideas they have which will be difficult to emulate. How'd they get to thinking of shipping volumes!

Could north Korean won appreciate under a disarm scenario?

I'd love to know what they read and get my hands on it.

Grants interest rate observer only so far but I'm not convinced to subscribe

[theozmancometh]

@DrValue

I suggest reading Hedge Fund Wizards, specifically chapter 7.

in the meanwhile here are some summaries

https://keanchan.com/2017/01/16/my-main-takeways-from-market-wizard-jamie-mai/

http://the7circles.uk/jamie-mai-seeking-asymmetry/

[jmp8822]

I've dabbled in LEAPS.  I run a concentrated book and have bought some LEAP puts in the past (3% or so of portfolio a couple times - catastrophe bets that haven't paid off). 

 

Currently, I have call LEAPS that I bought Q3 last year with about 10% of portfolio value, funded by a sale of puts roughly at the money, to net out to zero cash (puts/calls on same company - an oil stock).  It's a high implied volatility stock, so selling the puts ATM funded quite a few far out of the money calls - puts sold at $10 - calls bought mostly at $30.  I think I was able to get approximately 6-1 call/put with max loss at put expiration of 20% of portfolio value if the puts were exercised and the stock hit zero. For reference, the stock is up about 50%, so I won't get put (thus far), but the calls aren't in the money. The calls are basically an attempt to get massive leverage to crude oil rising dramatically this year - a position that I have some conviction in.  Said another way, I don't really think oil is headed down (so puts shouldn't get exercised in my analysis), and if oil does hit a high number, I could have a large gain.

 

My warning on the LEAP discussion is be willing to think through what your goal is and how immune/not immune you are to volatility.  For instance, my portfolio ended the year up 70% or so total because the LEAPS were up about 6X or so (though they were never in the money, but close). However, YTD my portfolio is down 19% or so because of the underlying stock pulling back and some decay (though the puts I sold also decay which slightly helps).  Basically, I have an event (oil prices going up this summer/3Q/4Q) and a stock that should skyrocket with crude oil if it hits $80-$90+ and I'm willing to wait for that, at the expense of losing money if oil/the company goes totally the other direction, and not losing much if the stock treads water because I captured the expensive volatility upfront with the put sale.

 

For reference, this is the first time I've ever put on this strong of a LEAP trade because I liked the setup and the huge upside if I'm right. No one is expecting oil to hit $80-$90+ this year (as far as I can tell), so I was willing to take the risk which appears asymmetric based on my analysis of the oil market. And, if I'm dead wrong, I can handle losing 20% if the underlying hits zero - certainly wouldn't be the first time I'd been wrong and moved on. That said, I do still think the probability of the stock actually hitting zero is low.

[jhcap]

I too am enamored with what Cornwall Capital did, however I don't think that SVXY was a good example of their type of investing as the time variable was not knowable. SVXY steadily climbed for years and it would have been very easy for the LEAPS to have expired before the drop. This is different from the Capital One example which had a court decision date that clearly determined when the binary event would occur and therefor allowed the Cornwall guys to purchase the appropriately dated options. For this reason, I think finding companies that have depressed stock prices due to law suits with clearly defined time lines are a good place to search for these types of investments.

[RichardGibbons]

My general thought on LEAPs is that there ought to be a way to use them reliably to get unusually large returns.  My reasoning is that LEAPs are largely priced based on the volatility of the underlying rather than the fundamentals of the business. Thus, if one finds a sufficiently undervalued business, the business ought to be more likely to have higher future volatility on the upside than the downside.  Thus, if you can find such businesses that have LEAP calls with low implied volatility, those ought to have above average returns.

 

That said, that's how it works in my head, but I haven't implemented that strategy yet.  (Partly because it's a lot of work, and it's mentally draining doing options investing because, done right, I think you get a bunch of small losers, and a few big winners.)