Do you have the balls?

[alwaysdrawing]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

Bagholding?

 

Have they put you on a respirator yet?

 

Got your fill of tangible book equity bank stocks before a depression?

 

Ahh.  What we've got here is a gloater.

 

Let's see what the next year brings.  I'm betting we haven't seen anything yet.

 

Oh and by the way, I've been saying the same thing for a couple weeks.

[TwoCitiesCapital]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

The initial approach is just a simple barbell type portfolio. The other approach is Dollar-cost-averaging.

 

Not sure there's a name for the combined concept. Seems like a novel approach with high potential for massive gains/losses in the intermediate term.

 

I'd prefer in-the-money options until vol premiums come down and then might be more comfortable rolling to @ the money ones.

[alwaysdrawing]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

The initial approach is just a simple barbell type portfolio. The other approach is Dollar-cost-averaging.

 

Not sure there's a name for the combined concept. Seems like a novel approach with high potential for massive gains/losses in the intermediate term.

 

I'd prefer in-the-money options until vol premiums come down and then might be more comfortable rolling to @ the money ones.

 

You also forgot the last one:  WFC at $0.  Pay another $5.50 for 2022 at-the-money leaps

[Jurgis]

There's gonna be a ball before Fairfax annual meeting. Unless Sanjeev cancels it and tells you that value investors don't have balls.  ::)

 

QFT.

[Studesy]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

So at the current price, these LEAPS cost roughly 20% annualized (leverage cost + embedded put + lost dividends). In other words all else equal, WFC's share price will need to increase at 20% annualized over the next 1.85 years in order to break even.  Why not just buy WFC outright and find cheaper leverage in another issue whether via options or margin+hedge??

 

[samwise]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

The word you are looking for is probably Martingale.

https://en.m.wikipedia.org/wiki/Martingale_(betting_system)

[ERICOPOLY]

I don't know what the name of this strategy is...  if anyone knows a name for it that's all I'm after.

 

Hypothetical trading behavior as follows:  You begin with enough cash to buy the common without margin, but instead you expect volatility and don't care about potentially losing $5.50 per share between now and 2022.  So you begin by purchasing enough LEAPS calls to represent the notional value of the amount of common you could otherwise purchase with your remaining cash.  You keep doing that every time the stock drops $10.

WFC at $50.  Pay $5.50 for 2022 at-the-money leaps.

WFC at $40.  Pay another $5.50 for 2022 at-the-money leaps.

WFC at $30.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $20.  Pay another $5.50 for 2022 at-the-money leaps

WFC at $10.  Pay another $5.50 for 2022 at-the-money leaps

etc.. etc...

 

You just keep accumulating calls.

 

2022 is on the other side of an estimated timeline for a vaccine to be widely available (12-18 months)

 

Jokes aside, is there a name for this kind of a trading strategy?

 

The word you are looking for is probably Martingale.

https://en.m.wikipedia.org/wiki/Martingale_(betting_system)

 

It differs a bit...  I think...

 

Let me simplify the example and just say you buy the same number of calls each time the stock declines by $10.

 

So you have put a total of $27.50 at risk by the time you've gone through 5 iterations of call purchases.  That's 'all' you've lost if the stock goes completely kaput to $0, for example.  You still have $22.50 in cash per share that you never allocated. 

 

Maximum loss is 55%, despite the common losing 100%.

 

The S&P500 will also likely be down 55% in that kind of outcome and you can put your remaining 45% in the S&P500 like it never happened and get the capital back upon eventual market recovery.

[meiroy]

 

Unless one expects to make x20 on the calls and have the mental endurance to actually hold them while they go from x2 to x6 to x10... I think it's much better to purchase bull spreads, especially when they are so expensive. This way you reduce the costs and can match it to your assumptions (e.g. I'll sell at x2 or x4 etc.). So if WFC is at 27 and one expects it to go to 37, then why pay for the upside from 37?

 

I'd wager that it at some point it would run up fast to a low valuation and this is where you make your money, with the options so expensive, holding it as it climbs up the ladder will lose the time value after already losing the volatility boost.

 

my 0.02 cents.

 

 

[RadMan24]

I had leaps on Oxy prior to oil crash at 50 and 60, I just sold and took 40-50% haircut and bought stock at $12. Removes the expiration risk, and i got longer time to make money back. I presume most leaps are like this, given the volatility, selling puts seems to be a better move if one wants to own the stock at these, or lower levels.

 

Barron's had a great piece over the weekend with some good ideas. meryl witmer is a tried and true value investor - would recommend reading her picks and take on the market.

[LC]

given the volatility, selling puts seems to be a better move if one wants to own the stock at these, or lower levels.

 

Agreed. And if vol really spikes, you can sell OOM covered calls to recoup some premium.

 

[ERICOPOLY]

 

Unless one expects to make x20 on the calls and have the mental endurance to actually hold them while they go from x2 to x6 to x10... I think it's much better to purchase bull spreads, especially when they are so expensive. This way you reduce the costs and can match it to your assumptions (e.g. I'll sell at x2 or x4 etc.). So if WFC is at 27 and one expects it to go to 37, then why pay for the upside from 37?

 

I'd wager that it at some point it would run up fast to a low valuation and this is where you make your money, with the options so expensive, holding it as it climbs up the ladder will lose the time value after already losing the volatility boost.

 

my 0.02 cents.

 

Why not wait to write the covered call until AFTER it has run to 37 if a run to 37 is what you are expecting?  This way you take all of the invested money off the table and have it on hand to repeat the trick if WFC drops back to 27.  Then if it goes back to 37 you have twice the gain.  And if things will be volatile for a while, you might get yet a third repeat.

[ERICOPOLY]

I have found bull spreads very annoying in the past when I've used them because when the stock climbs the volatility disappears on the call you bought and it rises rather painfully on the one you sold.  As the stock goes from $27 to $37, you might lose $3 of volatility on the $27 and find that the $37 concurrently gains $3 in volatility.  So for a stock rise of $10 you only immediately benefit by $4 (and you get more after a long and boring decay).

[clutch]

As I have deployed all my cash in my investment accounts, the question becomes whether I should deposit more with some of my incoming cash flows.

 

Just a couple of days ago, I was sure to do this, but now, I'm getting a bit scared. I should have enough emergency savings and my job should be fine (I hope), but now I worry about my parents who are not as well prepared as myself. I'm leaning toward keeping more cash.

 

So, yeah, I don't have the balls ...

[Kaegi2011]

I have found bull spreads very annoying in the past when I've used them because when the stock climbs the volatility disappears on the call you bought and it rises rather painfully on the one you sold.  As the stock goes from $27 to $37, you might lose $3 of volatility on the $27 and find that the $37 concurrently gains $3 in volatility.  So for a stock rise of $10 you only immediately benefit by $4 (and you get more after a long and boring decay).

 

Eric - do you have a real example of when this has happened?  I'm not doubting it, but just trying to figure out in my head why this is the case as the delta differential between the two should remain the same as one gets deep ITM and one gets to ATM (And of course converge if both are deep ITM). 

 

Also, how do you think about the instance where you can do 2x/3x/4x the contracts for the same amount of capital using a bull spread vs. an outright call?

[ERICOPOLY]

I have found bull spreads very annoying in the past when I've used them because when the stock climbs the volatility disappears on the call you bought and it rises rather painfully on the one you sold.  As the stock goes from $27 to $37, you might lose $3 of volatility on the $27 and find that the $37 concurrently gains $3 in volatility.  So for a stock rise of $10 you only immediately benefit by $4 (and you get more after a long and boring decay).

 

Eric - do you have a real example of when this has happened?  I'm not doubting it, but just trying to figure out in my head why this is the case as the delta differential between the two should remain the same as one gets deep ITM and one gets to ATM (And of course converge if both are deep ITM). 

 

Also, how do you think about the instance where you can do 2x/3x/4x the contracts for the same amount of capital using a bull spread vs. an outright call?

 

I guess take 2022 WFC calls as an example.  Today the $27.50 last sold for $6.20 and the $37.50 last sold for $3.30.  Assuming you can also get those prices, you have a $2.90 capital outlay that will be worth $10 at expiry if the stock is at least as high as $37.50 by expiry.  So roughly the full 3.45x return in two years. 

 

If it ran to $37.50 tomorrow morning, I estimate you'd gain $7 on the call you are long and lose $3 on the call you are short. 

 

Essentially, the $2.90 invested is now worth $6.90 perhaps?  2.37x return.  It can grow to about a 3.45x return maximum.  In my experience, I have never been able to realize that full 3.45x return.  I get too nervous about the chance of 100% capital loss at that point, with limited further gain to justify holding it to term.  I feel the strong need to bag the profit at that point when the risk/reward changes significantly.  For all the initial risk, I never get the full reward.

 

 

 

 

 

[Kaegi2011]

I have found bull spreads very annoying in the past when I've used them because when the stock climbs the volatility disappears on the call you bought and it rises rather painfully on the one you sold.  As the stock goes from $27 to $37, you might lose $3 of volatility on the $27 and find that the $37 concurrently gains $3 in volatility.  So for a stock rise of $10 you only immediately benefit by $4 (and you get more after a long and boring decay).

 

Eric - do you have a real example of when this has happened?  I'm not doubting it, but just trying to figure out in my head why this is the case as the delta differential between the two should remain the same as one gets deep ITM and one gets to ATM (And of course converge if both are deep ITM). 

 

Also, how do you think about the instance where you can do 2x/3x/4x the contracts for the same amount of capital using a bull spread vs. an outright call?

 

I guess take 2022 WFC calls as an example.  Today the $27.50 last sold for $6.20 and the $37.50 last sold for $3.30.  Assuming you can also get those prices, you have a $2.90 capital outlay that will be worth $10 at expiry if the stock is at least as high as $37.50 by expiry.  So roughly the full 3.45x return in two years. 

 

If it ran to $37.50 tomorrow morning, I estimate you'd gain $7 on the call you are long and lose $3 on the call you are short. 

 

Essentially, the $2.90 invested is now worth $6.90 perhaps?  2.37x return.  It can grow to about a 3.45x return maximum.  In my experience, I have never been able to realize that full 3.45x return.  I get too nervous about the chance of 100% capital loss at that point, with limited further gain to justify holding it to term.  I feel the strong need to bag the profit at that point when the risk/reward changes significantly.  For all the initial risk, I never get the full reward.

 

Thanks, Eric.  So using the same example, are you saying that you would be less inclined to exit a long 27 call only position if it opened at 37 tomorrow? 

 

Also using the same example, you're saying you'd rather pay $6.20 for a call vs. $5.80 net for 2 call spreads? 

 

Again, just trying to understand the rationale.  The appeal for me of a LEAP is 1) the cheap leverage assuming vol isn't insane, and 2) way much more upside in case the stock does break out significantly, so I'm generally not using bull spreads.  However, the thought that I can leg into the market as it is today with the uncertainties using less capital (in case I need it later to double down), and also to help pay for some of the expensive vol, makes it more of an appealing alternative. 

 

[ERICOPOLY]

Thanks, Eric.  So using the same example, are you saying that you would be less inclined to exit a long 27 call only position if it opened at 37 tomorrow? 

 

It all depends on the rest of the portfolio, and the reason for the market rally.  I would sell off a bunch if it was just a rally due to a short selling ban, but I would hold if it was a rally due to a vaccine or effective antiviral therapy being approved by the FDA, because under that assumption $70 is possible in two years and a 7x return on the calls.

[stahleyp]

Eric,

 

How are you positioned now?

[Hoodlum]

Expect a lot of rating warning and downgrades in the coming days.

 

https://www.reuters.com/article/us-health-coronavirus-ratings-moody-s-ex/exclusive-moodys-readying-for-mass-global-downgrade-of-virus-hit-firms-idUSKBN2162VI

 

“We are undertaking a global review of ratings that are impacted by the virus,” Managing Director of Global Strategy & Research Anne Van Praagh and Christina Padgett, Associate Managing Director of Corporate Finance Research, said in an interview.

 

“By the end of the week we will have a fair amount of rating actions,” Van Praagh added, saying it was likely to impact whole groups of companies or sectors all being impacted in the same way.

 

Earlier this week Moody’s said that about 9% of the 920 companies it rated in Europe, the Middle East and Africa had a “high exposure” to the effects of the coronavirus outbreak, with another 54% having moderate exposure.

 

It also estimated that about 16% of the more than 2,000 companies it rates in North America would be at high risk of rating move under the now widely expected scenario of a global recession.

 

“We have the virus, the big fall in commodity prices and now (the pressure in) the capital markets. This combination of events is unprecedented, so we have to come at it from several different angles,” Padgett said.

 

The first flurry of downgrades could take a few weeks. As well as sectors like airlines, oil and gas and travel, shipping, hotels and entertainment and leisure will all be heavily impacted too.

[ERICOPOLY]

Eric,

 

How are you positioned now?

 

At-the-money calls, out-of-the-money calls, and cash.  I will have a lot of cash at some point here, because of a full redemption at Dec 31st prices -- still waiting for the audit to complete before releasing the cash to me.

 

 

 

[stahleyp]

Eric,

 

How are you positioned now?

 

At-the-money calls, out-of-the-money calls, and cash.  I will have a lot of cash at some point here, because of a full redemption at Dec 31st prices -- still waiting for the audit to complete before releasing the cash to me.

 

Thanks. What percent of cash will you have once the redemption pays out? I'm getting more bullish but willing to listen to counter views.

[ERICOPOLY]

Eric,

 

How are you positioned now?

 

At-the-money calls, out-of-the-money calls, and cash.  I will have a lot of cash at some point here, because of a full redemption at Dec 31st prices -- still waiting for the audit to complete before releasing the cash to me.

 

Thanks. What percent of cash will you have once the redemption pays out? I'm getting more bullish but willing to listen to counter views.

 

If prices remain steady, about 63% cash, or 80% if I count the Dhandho that I expect to be liquidating at some point between now and 2022 expiry.  If that liquidation drags out I will keep rolling those calls if necessary.

 

I am mulling over the idea of building cash over next 19 months by writing out-of-the-money puts month to month.  That will either build cash or accomplish my desire of a lower entry point. 

 

 

 

[enoch01]

how ballsy does one need to be to sell volatility currently?

[ERICOPOLY]

how ballsy does one need to be to sell volatility currently?

 

Depends on how much you are risking.  I'm speaking about cash-covered puts.

 

 

 

[ERICOPOLY]

I already have ATM calls.  Take for example the $20 strike WFC put, expiring a month from now on April 17th.  The bid is $1.25.

 

19 months x 1.25 == $23.75.  That's so high you certainly don't need to commit all of the cash to the endeavor.