Ask Eric!

[ERICOPOLY]

This board is also a very beneficial therapy group when markets go very low.  It is responsible for all of my good decisions (I'm responsible for the bad ones). 

[muscleman]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down.

[ERICOPOLY]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down.

 

Okay, here is an example:

 

I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008.

 

The decline was stemmed by the strikes I had on the leverage.  So it goes from leveraged, down to a point of no leverage.  From there, the stress declines as I can wait out that position forever at that point.

 

Go back and remember what early 2009 was like.  There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009.  The company traded for about $12, the puts were $10 strike, and the premiums were $5.  So you could double your money-at-risk just by having the stock not decline below $10 from $12.  I even wrote some $2.50 strike RWT puts for about 40% yield.  Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4.  So you could make a ton of money by the stock just not moving.  Then LUK was down at around $16 and you could write the $15 strike put for $5. 

 

So while my total net worth was down by a ton, there were all these ways to make insane income from it.  The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still.

 

I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts.  You could have 100% upside in Fairfax but only 40% downside in these other names.  Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls.  And a lot of that downside was out-of-the-money.  The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT.

 

So when Fairfax eventually recovered, I wound up being way up on the year.  But I wasn't leveraged on the downside.  I just did some swapping around. 

 

Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc...  I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market.  Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake.  It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls.  The reason is... FFH didn't have their book value invested more than 50% into stocks.  And they had slugs like JNJ which were just not going to move the needle.

 

But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time.

 

This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor).

[muscleman]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down.

 

Okay, here is an example:

 

I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008.

 

The decline was stemmed by the strikes I had on the leverage.  So it goes from leveraged, down to a point of no leverage.  From there, the stress declines as I can wait out that position forever at that point.

 

Go back and remember what early 2009 was like.  There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009.  The company traded for about $12, the puts were $10 strike, and the premiums were $5.  So you could double your money-at-risk just by having the stock not decline below $10 from $12.  I even wrote some $2.50 strike RWT puts for about 40% yield.  Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4.  So you could make a ton of money by the stock just not moving.  Then LUK was down at around $16 and you could write the $15 strike put for $5. 

 

So while my total net worth was down by a ton, there were all these ways to make insane income from it.  The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still.

 

I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts.  You could have 100% upside in Fairfax but only 40% downside in these other names.  Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls.  And a lot of that downside was out-of-the-money.  The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT.

 

So when Fairfax eventually recovered, I wound up being way up on the year.  But I wasn't leveraged on the downside.  I just did some swapping around. 

 

Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc...  I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market.  Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake.  It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls.  The reason is... FFH didn't have their book value invested more than 50% into stocks.  And they had slugs like JNJ which were just not going to move the needle.

 

But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time.

 

This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor).

 

 

I see. Very interesting experience indeed!

[Liberty]

Hi Eric,

 

You write: "Several times since 2006 I've had 50% declines from earlier peaks."

 

Are these all concentrated around 2008-2009, or did any of the drops take place in a favorable market?

 

I find it easy to imagine that even the best investor saw everything go down a lot in 2008-2009. So it seems more interesting to know if any of your drops were less due to overwhelming macro forces and more to factors specific to your stock-picking choices.

 

Thanks.

[ERICOPOLY]

Hi Eric,

 

You write: "Several times since 2006 I've had 50% declines from earlier peaks."

 

Are these all concentrated around 2008-2009, or did any of the drops take place in a favorable market?

 

I find it easy to imagine that even the best investor saw everything go down a lot in 2008-2009. So it seems more interesting to know if any of your drops were less due to overwhelming macro forces and more to factors specific to your stock-picking choices.

 

Thanks.

 

There was also the December 2007 peak to the low that was hit the day before the 2008 short-selling ban.  That was about 40%-45% drop.

 

Then in 2011, the April 4th net-worth peak (the day I went in for foot surgery) and then it dropped 50% (almost exactly) to the December low when BAC was bumping $5.

 

 

Alright, now would those highs have ever really been there in the first place were it not for my style of investing?  Of course not.  So I only "lost" what others would only have made in a parallel universe.  Do you count your parallel universe losses as real losses?

[hyten1]

eric, man writing puts with 40% premium is insane, damn i didn't really learn about options until 2012 or so

 

man 40%!!!!

 

[ERICOPOLY]

eric, man writing puts with 40% premium is insane, damn i didn't really learn about options until 2012 or so

 

man 40%!!!!

 

 

I wrote that RWT put with $10 strike for $5.  Stock was at $11.  The stock barely scraped the strike price briefly.  So you double the $5 you are risking if the stock merely stagnates.

 

Now, considering that it is a "volatility" premium, consider that RWT was one of the least volatile stocks I tracked coming out of the crisis.  WFC is up 5x off it's lows, RWT is up less than 2x.

 

I remember the $25 strike SHLD put went for $10.

 

You could make high returns if stock prices merely went sideways.  And yet if they plunged a lot more, you might not necessarily lose.

[hyten1]

truely crazy times. with the RWT even if you get put at $10 (and stock drop to $9). you would of gotten the stock essentially for $5 and you can then sell it at $9 and make $4 haha

 

crazy times

 

 

I wrote that RWT put with $10 strike for $5.  Stock was at $11.  The stock barely scraped the strike price briefly.  So you double the $5 you are risking if the stock merely stagnates.

 

Now, considering that it is a "volatility" premium, consider that RWT was one of the least volatile stocks I tracked coming out of the crisis.  WFC is up 5x off it's lows, RWT is up less than 2x.

 

I remember the $25 strike SHLD put went for $10.

 

You could make high returns if stock prices merely went sideways.  And yet if they plunged a lot more, you might not necessarily lose.

[ERICOPOLY]

truely crazy times. with the RWT even if you get put at $10 (and stock drop to $9). you would of gotten the stock essentially for $5 and you can then sell it at $9 and make $4 haha

 

crazy times

 

 

I wrote that RWT put with $10 strike for $5.  Stock was at $11.  The stock barely scraped the strike price briefly.  So you double the $5 you are risking if the stock merely stagnates.

 

Now, considering that it is a "volatility" premium, consider that RWT was one of the least volatile stocks I tracked coming out of the crisis.  WFC is up 5x off it's lows, RWT is up less than 2x.

 

I remember the $25 strike SHLD put went for $10.

 

You could make high returns if stock prices merely went sideways.  And yet if they plunged a lot more, you might not necessarily lose.

 

Going back to the headlines of those days, you had people who didn't want to invest because they thought market would go lower.

[yitech]

I hope no one wrote any puts on Lehman to pocket the easy money before the weekend it went bust because that would really suck. :)

[rayfinkle]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down.

 

Okay, here is an example:

 

I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008.

 

The decline was stemmed by the strikes I had on the leverage.  So it goes from leveraged, down to a point of no leverage.  From there, the stress declines as I can wait out that position forever at that point.

 

Go back and remember what early 2009 was like.  There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009.  The company traded for about $12, the puts were $10 strike, and the premiums were $5.  So you could double your money-at-risk just by having the stock not decline below $10 from $12.  I even wrote some $2.50 strike RWT puts for about 40% yield.  Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4.  So you could make a ton of money by the stock just not moving.  Then LUK was down at around $16 and you could write the $15 strike put for $5. 

 

So while my total net worth was down by a ton, there were all these ways to make insane income from it.  The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still.

 

I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts.  You could have 100% upside in Fairfax but only 40% downside in these other names.  Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls.  And a lot of that downside was out-of-the-money.  The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT.

 

So when Fairfax eventually recovered, I wound up being way up on the year.  But I wasn't leveraged on the downside.  I just did some swapping around. 

 

Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc...  I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market.  Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake.  It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls.  The reason is... FFH didn't have their book value invested more than 50% into stocks.  And they had slugs like JNJ which were just not going to move the needle.

 

But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time.

 

This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor).

 

Eric-  thanks for this. 2 questions:

 

1) for something like rwt, did you follow this for a while before premiums became rich and therefore had comfort with the underlying company? Or was this more "hunt for premium yield and wait"?

2) how do you think about true $$ at risk when selling puts on a company like rwt? I'm trying to better understand your thoughts on position sizing....

 

Thanks!

[ERICOPOLY]

Eric, I know you like to concentrate your bets. Is there any time that you put in a lot of money and the market goes against you severely?

What is the most concentrated bet that you made?

 

100% is the most concentrated.

 

Several times since 2006 I've had 50% declines from earlier peaks.

 

What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down.

 

Okay, here is an example:

 

I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008.

 

The decline was stemmed by the strikes I had on the leverage.  So it goes from leveraged, down to a point of no leverage.  From there, the stress declines as I can wait out that position forever at that point.

 

Go back and remember what early 2009 was like.  There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009.  The company traded for about $12, the puts were $10 strike, and the premiums were $5.  So you could double your money-at-risk just by having the stock not decline below $10 from $12.  I even wrote some $2.50 strike RWT puts for about 40% yield.  Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4.  So you could make a ton of money by the stock just not moving.  Then LUK was down at around $16 and you could write the $15 strike put for $5. 

 

So while my total net worth was down by a ton, there were all these ways to make insane income from it.  The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still.

 

I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts.  You could have 100% upside in Fairfax but only 40% downside in these other names.  Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls.  And a lot of that downside was out-of-the-money.  The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT.

 

So when Fairfax eventually recovered, I wound up being way up on the year.  But I wasn't leveraged on the downside.  I just did some swapping around. 

 

Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc...  I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market.  Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake.  It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls.  The reason is... FFH didn't have their book value invested more than 50% into stocks.  And they had slugs like JNJ which were just not going to move the needle.

 

But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time.

 

This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor).

 

Eric-  thanks for this. 2 questions:

 

1) for something like rwt, did you follow this for a while before premiums became rich and therefore had comfort with the underlying company? Or was this more "hunt for premium yield and wait"?

2) how do you think about true $$ at risk when selling puts on a company like rwt? I'm trying to better understand your thoughts on position sizing....

 

Thanks!

 

1)

A mortgage REIT is regulated differently from an investment bank, so I didn't think RWT was a Lehman Brothers.  I had heard about RWT for a while as it was relatively popular holding for (some) value investors before the crisis hit.  The other names I wrote puts on at the time were WFC, GE, AXP, SHLD, LUK.  I was trying to stick with companies that either were in the Buffett portfolio or which were at least having a lot of credibility (like LUK) from a lot of seasoned, competent value investors. 

 

2)

I just subtract the put premium from the strike price.  So if the premium is $5, that's somebody else's money, not mine.  When I write the $10 put, if the stock itself goes to zero it's not $10 I lose, just $5.  So I have $5 of my own money at risk.  Therefore, as long as it trades above $10 at expiry, I've made 100% on my money at risk.

 

 

[rayfinkle]

Thanks Eric. I've been thinking the through the logic of value at risk and agree with what you're saying. I think it could be pretty conservative though, as it implies: 1) some likelihood of bk or other odd scenario driving a stock to zero, 2) that for some reason you can't unwind before them. Clearly both of these outcomes are possible, but the point is that it would be a pretty tough spot for this to actually happen--especially on companies with staying power (e.g., buffet type companies).  Long way of saying I agree and have been putting my money where my mouth is for a while with good results.

[kmukul]

Hmm will you post anything for 16... i remember the 11 one :) THanks and Happy new year

[JBird]

I imagine that since stepping back from managing your portfolio you've got a bit more free time. Do you have other interests you're working on now?

[ERICOPOLY]

I imagine that since stepping back from managing your portfolio you've got a bit more free time. Do you have other interests you're working on now?

 

I still manage the taxable portfolio.  However it feels great to have a significant sum (all of the Roth IRAs) tucked away under somebody else's eye.

 

We are busy gardening.  Kids are finishing the school year.  Going houseboating on Lake Powell next week.  Pretty busy actually, although everyone else does this in addition to a job -- so in that respect it's hard to call this "busy".

[moody202]

We have talked a lot about your options strategy during the crisis years. I am curious to know what your strategy was before the crisis and how it has changed in the past 4-5 years.

 

Also -- when you trade options, whats your thought process for using short term options vs. long term options?

 

 

[ERICOPOLY]

We have talked a lot about your options strategy during the crisis years. I am curious to know what your strategy was before the crisis and how it has changed in the past 4-5 years.

 

Also -- when you trade options, whats your thought process for using short term options vs. long term options?

 

The time before the crisis was a short one.  My first options ever purchased were FFH calls in 2006.  So there's not a lot of history there to talk about.

[One World Trader]

 

Do you still have options out and think things have a good chance of turning around?

[ERICOPOLY]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

 

 

 

[jeffmori7]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

You know, in Canada, there is a company called Home Capital Group, they offer mortgages to people in your situation, where traditionnal lenders do no want to help you. There are probably some players in that niche in the US too?

[sswan11]

If you were able to buy for cash you could likely then take out a HELOC in lieu of 30 yr mortgage.  I did that, and (Umpqua) bank offered to convert adjustable rate HELOC to fixed-rate (4%) 7 yr mortgage. 

 

Thrifts might also be could to ping as opposed to large commercial banks...might be more flexible?

[ERICOPOLY]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

You know, in Canada, there is a company called Home Capital Group, they offer mortgages to people in your situation, where traditionnal lenders do no want to help you. There are probably some players in that niche in the US too?

 

I thought I'd give traditional lenders one more shot before I'd go to hard money route.  There is a mortgage out there, it's just that the terms are getting worse.

 

What a bunch of jerks though... their big hangup is that MPIC is "illiquid" because of the potential 90 day lockup.  Yet they'll lend to people all day long who might get fired and not find work again for years.

 

And don't they make money if they take the house from me in foreclosure and flip it?  I even offered them 50% down and they still said no.  What the f*** is their problem?

 

And yes, for you Wells Fargo fans, they did try (once again) to get me to move my assets to Wells Fargo in order to qualify me for a loan with their "private bank".  Plus, with all the cash piling up in my checking account (getting ready for the down payment) a branch employee from Los Altos (where I opened the account) called to ask if I'd like to invest in one of their other products that earns more return than my checking account.  So they're working hard at selling me even while being relatively useless at the same time.

 

 

[ERICOPOLY]

If you were able to buy for cash you could likely then take out a HELOC in lieu of 30 yr mortgage.  I did that, and (Umpqua) bank offered to convert adjustable rate HELOC to fixed-rate (4%) 7 yr mortgage. 

 

Thrifts might also be could to ping as opposed to large commercial banks...might be more flexible?

 

 

It is my understanding that you can't deduct the mortgage interest from your taxes if you pay cash for the house and later take out a mortgage.

 

You only get the home loan interest tax deduction if the debt was incurred in the purchase of the home.  You can still deduct the interest even if you refinance that loan, but only up to the amount of the original loan size (up to the $1,000,000 limit).

 

So I want to avoid losing my tax deduction.