Tuesday, January 15, 2019

Trading companies that have just announced bankruptcy.

When companies announce bankruptcy, it is very likely that the stock price will eventually meander to zero and shareholders end up with nothing.

I was wondering if there was a way to take advantage of this scenario and profit off of it.

Today PCG announced bankruptcy proceedings and the stock cratered 50% to 8$.
Now at this point, say you short the stock , that is 800$ credited to your account , remember the stock will eventually end up at 0.However there are some protective actions you need to take.

From now till the stock is actually dissolved there can be a few movements north on minor news so you probably need some protection. You can buy the 8$ Call expiring say in 3 months.
This will protect you against any sudden upward move that might cause margin issues.

Monday, January 7, 2019

Relatively Risk Free Arbitrage Trades

Sounds like a bunch of typical traders' lingo right? 

This is a very simple concept and can be exploited with relatively minimal risk.
Let's get right to it, the strategy here is to take advantage of a merger that has already been announced, yet when the acquired company's shares trades for less than the purchase price.
In other words there is a risk involved in getting approval therefore the market decides to trade at a lower price, you as a trader take advantage of this.
Here's a real life example.

IBM announced they would buy RHT for 34B$ or 190$/ share, at the time RHT was trading at 120 or so. So that means IBM is paying a 70$ premium, however the day after the deal was announced, RHT rose only to 174$. This is because the market has factored in a 16$ risk. This is the quantified value if the deal doesn't go through.
This is where you as a trader can take advantage, either by outright purchase or via options. You pay more if you choose to enter directly via purchase however.
Now that the basics are explained, how can we trade this? Well there are a few options, like I said before you can just purchase RHT for 174$ and hope the deal closes with no concern about closing dates.
Or you could purchase Call contracts at the 180$ or 185$ strike price. 180$ strike will obviously be more expensive than the 185$ strike so I would probably choose 185$ strike.
Now the next important factor, choosing an expiry date. As per the announcement they mentioned they 'expected' it to close around the second half of 2019 , this points to October or November to be safe.
Therefore we can now construct a trade, Buy the 185$ Call with an expiry of November 2019.

If the deal goes through then the Call contract will immediately be worth at least 5$ intrinsically which corresponds to 500$ per contract.
Of course if the deal is stalled or canceled then all you lose is the premium i.e. the cost of the Call contract , compare that with the colossal loss if you were Long !

Tuesday, November 27, 2018

IBM's monster offer for RHT

I was put into RHT a few weeks ago, when a short put ended up deep in the money.
My basis was around the 125 point for around 9 contracts , translating to 900 shares.
With RHT trading at around 118 or so my positions were in the red by quite a bit.

But lo and behold, IBM's head Ginny Rometty decided that RHT was the solution to IBM's cloud conundrum and offered a 190$ price per share to take over the Linux software distributor.
Now many years ago I worked for an IBM contractor and noticed that the base OS was RHT and had to use an emulator to get into Windows.
I should have guessed that the partnership would have ended up in an acquisition.

Anyways 190$ would not be immediately realized because of something called "arbitration risk" and the premium was realistically only 174 and a corridor later formed between 169-175 until the merger was completely approved at which point the entire 190$ per share would be realized.
Obviously with the risks that entails I didn't want to wait and closed my positions.

My profit for the trade was around (174-125) x 900 = 44100$.
Now don't forget I entered the trade via short put options , therefore my basis was lower by around 1$ per contract for 9 contracts, i.e. 900$.
Therefore my final profit was 44100+900 = 45000$!

Another reason to always enter long positions via options...CHACHINGGG.

Monday, May 21, 2018

I'm back!

I'm back after a long hiatus, will restart my journey and will post trades shortly.
Been trading for 3 months now, just never got a chance to update the blog.

Tuesday, September 6, 2016

Friday, September 2, 2016

What a great day!

Its a bonafide month since I took over my accounts and I am happy with the results, the Buffet style piggy back account has so far yielded 4k profit and the IRA another 2k.
These are the relatively safe 25 delta trades a week out. The other accounts are quiet for now,I have a covered call going and another with cash secured puts on a higher IV stock and the final account is flat with a minor loss.
I tried a UVXY stunt without completely understanding the effect of contango, luckily i closed the position the very next day for around a 50$ loss.

Meanwhile around the world, jobs miss, crude up a dollar to 44.27, banking and finance up big, Trump nibbles at Clinton's lead with a splash in Mexico City.

Say hi to my new favorite (for the time being at least) the 232 year old Bank of New York Mellon (BK), lovin' it so far.

Sunday, August 28, 2016

Trade ideas by piggy backing on Buffet's positions.

We all know that when it comes to epic long holders, Warren Buffet comes to mind, after all who doesn't know about his epic positions in American Express, Coca Cola or IBM.
But did you know that Buffet is also a legendary Put seller? Per the BRK annual report in 2008 he sold 5B$ worth of Puts 10-15 years away from expiration on major world indices like the Dow Jones , Nikkei, FTSE and SP500.
Theta decay over the years has made that 5B$ short position now worth around 2.2B$ netting him a profit of around 2.8B$.

Now here's my idea, Berkshire Hathaway consists of a handful of positions in large relatively stable companies that form the bedrock of American capitalism.
Why not piggy back on those positions and use them to our advantage.

Here's a list of Buffet's top 19 positions. link

Company Symbol Holdings Mkt. price Holding value Stake 25 Delta Put Option price 1 week out (or month out if monthly) Strike Monthly/Weekly Annualized Return
Kraft Heinz Co KHC 325,634,818 $88.37 $28,776,348,867 26.76% 0.45 85 M 6%
Wells Fargo & Co WFC 479,704,270 $48.39 $23,212,889,625 9.56% 0.17 47.5 W 19%
The Coca-Cola Co KO 400,000,000 $43.56 $17,424,000,000 9.31% 0.13 43 W 16%
International Business Machines Corp. IBM 81,232,303 $158.71 $12,892,378,809 8.52% 0.37 155 W 12%
American Express Company AXP 151,610,700 $64.92 $9,842,566,644 16.45% 0.3 64 W 24%
Phillips 66 PSX 78,782,000 $78.80 $6,208,021,600 14.80% 0.35 77 W 24%
U.S. Bancorp USB 85,063,167 $43.28 $3,681,533,868 4.95% 0.17 42.5 W 21%
Wal-Mart Stores, Inc. WMT 40,226,402 $71.13 $2,861,303,974 1.31% 0.26 70 W 19%
Moody's Corporation MCO 24,669,778 $106.10 $2,617,463,446 12.81% 0.44 100 M 5%
DaVita HealthCare Partners Inc DVA 38,565,570 $64.02 $2,468,967,791 18.72% 0.35 60 M 7%
Charter Communications, Inc. CHTR 9,337,491 $250.40 $2,338,107,746 3.45% 1.6 242.5 W 34%
Deere & Company DE 21,959,246 $86.99 $1,910,234,810 7.00% 0.37 85 W 23%
Goldman Sachs Group Inc GS 10,959,519 $165.94 $1,818,622,583 2.69% 0.85 162.5 W 27%
Apple Inc. AAPL 15,227,702 $106.97 $1,628,907,283 0.28% 0.28 104 W 14%
General Motors Company GM 50,000,000 $31.53 $1,576,500,000 3.23% 0.1 30.5 W 17%
USG Corporation USG 39,002,016 $28.32 $1,104,537,093 26.70% 0.35 27 M 16%
Verisign, Inc. VRSN 12,952,745 $74.85 $969,512,963 12.04% 0.3 70 M 5%
Bank of New York Mellon Corp BK 20,827,212 $40.72 $848,084,073 1.94% 0.19 40 W 25%

A few points , the annualized return should theoretically be calculated after subtracting premium received, but to add an extra level of conservatism I've included the full risk on the table in the calculation and also for expediency.
Return % = (Option price/Strike) x 100 x n
n= 52 for weeklies and 12 for monthlies.

As you can see for the Put seller who has cash to secure his position, BK and AXP jut out asking to be exploited.
The problem with some of the higher return tickers are many fold. CHTR is a 250$ stock,I certainly dont want that sort of capital outlay, especially if the position gets assigned.
On the hand macro conditions give me pause on PSX for example, I already have a losing oil position and I dont want to add to it.
DE looks lucrative as well, but I am somewhat biased against heavy industry stocks and not to mention the steep 85$ stock price translating to 8500$ of risk.

The sweet spot in terms of capital outlay and risk seems to be the 40-65$ corridor, hence BK and AXP come to the fore, and an option price of around 20-30c seems lucrative at 25 delta.

This of course translates to the possibility of achieving profit at a 25% chance the position ends up in the money, pretty good profit potential.
The above is especially true, since it's backed by Buffet, the stocks are blue chip and relatively stable, you can easily adjust your position after a week and do this like clockwork every week.
Another important factor is liquidity, but as long as we get into the trade around the 25 delta 1 week out and slightly below the 50 day moving average the position should be relatively safe to end up OTM.

C is another stock that offers almost identical risk/reward potential as BK but isnt part of Buffet's portfolio.