Picking up pennies

[hyten1]

i was wondering how many of you pick up pennies, meaning doing small opportunistic trades?

 

for example znga is getting crush right now you can sell jan 15 $2 puts for $0.39, if you get put you essentially pick up znga at $1.61 a share which is almost less than net net, its less than book, and znga has over 1.2bil in cash equivalent (no debt) etc.

 

yes znga's biz is declining they are trying to figure out the next chapter etc etc.

 

the point is not zynga, the point is small opportunistic trades that have low risk (one way to limit risk is sizing), making a few bucks here and there. do people do this? if so what are some of these opportunistic trades that you guys do?

 

i usually sell puts on very out of money strike prices (unless market crashes the likelihood of getting put is very very low)

 

[Parsad]

i was wondering how many of you pick up pennies, meaning doing small opportunistic trades?

 

Used to, but then Canada stopped production of pennies.  Now I pick up nickels!  ;D

 

Kidding aside, yes I do look for such opportunities but not through options.  Usually other forms of arbitrage.  Cheers!

[stahleyp]

I'll write puts on companies I want to own anyway. The thing that sucks about put writing, is that it's all taxed as a short term capital gain....even if you've held the position longer than a year.  :(

[hyten1]

agree, i hate these short term capital gains. i guess the way i figure i would of gotten zero on these small trades, 50% of the gain is better than nothing ... but i hear ya, when tax season comes it does suck big time

 

 

I'll write puts on companies I want to own anyway. The thing that sucks about put writing, is that it's all taxed as a short term capital gain....even if you've held the position longer than a year.  :(

[ERICOPOLY]

I'll write puts on companies I want to own anyway. The thing that sucks about put writing, is that it's all taxed as a short term capital gain....even if you've held the position longer than a year.  :(

 

For that tax reason I stopped buying calls in my portfolio margin account.  Now I'll just buy the common and hedge it with the put.  Then at least you have some expiring puts that you can hopefully take losses on to ease your tax burden on the puts you write.

 

[hyten1]

eric calls if held over 1 yr is long term as well, no ?

 

obviously short term calls have short term capital gains

[Hielko]

Slightly off-topic: Isn't it possible to shield yourself from short-term capital gains taxes by setting up an offshore company?

[ERICOPOLY]

eric calls if held over 1 yr is long term as well, no ?

 

obviously short term calls have short term capital gains

 

I'm saying that instead of the calls, you purchase the common paired with puts that hedge the common.

 

The puts will normally be short-term duration if you roll them annually.  And if your long position is working out with the common, you'll typically be getting losses on those puts -- of course due to wash sale rules the loss won't be useful until you eventually exit the puts altogether, but at least it will be a short term loss.

 

It's worth thinking about this stuff when your tax rate is 52% on short term gains (the top rate in California).

[watsa_is_a_randian_hero]

Slightly off-topic: Isn't it possible to shield yourself from short-term capital gains taxes by setting up an offshore company?

 

HF's do this...can an individual?

[watsa_is_a_randian_hero]

replying to OP here...

 

I've done exactly what you are talking about before: Sell put options at strikes that would be the equivalent of net-net.  Its almost always been large cap tech companies for the following reasons:

 

-techs often have no/low debt and high cash balances

-techs often have high implied vol's

-large cap techs have high liquidity in the market for their options

 

I've done this with cisco, dell, microsoft, and apple before (I think there were others too).  I do not currently have any naked put options sold though...pricing is not favorable for this currently in my opinion. 

 

Other strategies of "picking up pennies" I have used:

-selling options/shorting 3x/2x leveraged ETF's...especially UVXY and FAZ (high vol on the underlyings)

-buying SPACs, voting against deal, and collecting $

-Buying reverse splits/delisting transactions for fractional payouts.

-using options for merger arb

-using options in situations where its clear a "floor" has been established (two examples of this: ORH when it was buying back shares below book supporting price at 40, and BNI before Berkshire bought-out, but after it was clear Berkshire was buying supporting the price at 70).

[hyten1]

watsa thx

 

 

HF would like to know how a company or individual don't have pay  short -term cap gain

[Guest wellmont]

it's important to size the put selling correctly. I don't think many people factor in black swans when put selling. For example what if you made lots of "penny" bets by selling otm puts. Very rare events can bankrupt the person who did not size the bet correctly. One example would be a major Earthquake in Tokyo. Global depression (a real one). Or A major terrorist strike (bigger than 9/11) in Paris London or New York. A nuclear accident. China invading Taiwan.

 

A famous bullish trader back in the 90s went bust by selling puts. always keep in mind one of Buffett's principals. get rich slowly.

[twacowfca]

replying to OP here...

 

I've done exactly what you are talking about before: Sell put options at strikes that would be the equivalent of net-net.  Its almost always been large cap tech companies for the following reasons:

 

-techs often have no/low debt and high cash balances

-techs often have high implied vol's

-large cap techs have high liquidity in the market for their options

 

I've done this with cisco, dell, microsoft, and apple before (I think there were others too).  I do not currently have any naked put options sold though...pricing is not favorable for this currently in my opinion. 

 

Other strategies of "picking up pennies" I have used:

-selling options/shorting 3x/2x leveraged ETF's...especially UVXY and FAZ (high vol on the underlyings)

-buying SPACs, voting against deal, and collecting $

-Buying reverse splits/delisting transactions for fractional payouts.

-using options for merger arb

-using options in situations where its clear a "floor" has been established (two examples of this: ORH when it was buying back shares below book supporting price at 40, and BNI before Berkshire bought-out, but after it was clear Berkshire was buying supporting the price at 70).

 

I like your last situation, using options when it is clear that a floor has been established. However, in such cases, there is usually a greater risk adjusted expected return buying calls than selling puts when the market  price is near the floor. In that event, the upside can be many times  what could be made from selling the put, although the probability of at least a small profit on selling the put is greater.

 

When a call is bought in such situations, the maximum loss is limited to the price paid for the call. However, when a put is sold, there is still some risk that the floor could collapse, and the loss could be enormous in relation to the potential gain.  :)

[ASTA]

I agree twacowfca selling puts is cool and fun. But when the market turns and you get called on the put you are psychologically stuck in that stock. Whereas maybe another opportunity presents itself and you wrongly stay in the put stock. Guy Spier talks about this in his experience in 2008.

WMT at 46 is cool during 2008 but AXP at 10 is a better bet.

Just very hard regarding the psychology of getting called and the selling to buy a better opportunity.

For example I wrote a put on LO in Feb 2011 and made a cool buck but a better bet would have been a call.   

[watsa_is_a_randian_hero]

replying to OP here...

 

I've done exactly what you are talking about before: Sell put options at strikes that would be the equivalent of net-net.  Its almost always been large cap tech companies for the following reasons:

 

-techs often have no/low debt and high cash balances

-techs often have high implied vol's

-large cap techs have high liquidity in the market for their options

 

I've done this with cisco, dell, microsoft, and apple before (I think there were others too).  I do not currently have any naked put options sold though...pricing is not favorable for this currently in my opinion. 

 

Other strategies of "picking up pennies" I have used:

-selling options/shorting 3x/2x leveraged ETF's...especially UVXY and FAZ (high vol on the underlyings)

-buying SPACs, voting against deal, and collecting $

-Buying reverse splits/delisting transactions for fractional payouts.

-using options for merger arb

-using options in situations where its clear a "floor" has been established (two examples of this: ORH when it was buying back shares below book supporting price at 40, and BNI before Berkshire bought-out, but after it was clear Berkshire was buying supporting the price at 70).

 

I like your last situation, using options when it is clear that a floor has been established. However, in such cases, there is usually a greater risk adjusted expected return buying calls than selling puts when the market  price is near the floor. In that event, the upside can be many times  what could be made from selling the put, although the probability of at least a small profit on selling the put is greater.

 

When a call is bought in such situations, the maximum loss is limited to the price paid for the call. However, when a put is sold, there is still some risk that the floor could collapse, and the loss could be enormous in relation to the potential gain.  :)

 

agree, for stocks with a floor calls are the way to go.  I did $60 calls on BNI in 2009.  Then after the buyout was announced, I sold the $60 calls and bought call spreads from $95-$100 that paid off between 50-75% if the deal went through. 

 

Other floors...sold naked calls on TLT at rate equivalents of 2.5% for a while....this was in addition to already being outright short the long bond futures.

[netnet]

So, my practice is to pick up pennies, but not in front of bulldozers!

 

So that means, regular/event merger arb mostly and these days, I'm teaching my kids to do odd lot tenders.

[scorpioncapital]

I sell puts too. In canada, you can treat them as capital gains, especially if you don't trade them which makes it very tax advantageous.

 

I traded Silver wheaton jan 15 puts for $1.12 per contract with a strike of 13, current price $24. 32% return on collateral.

USNA options, October 30 for $0.53 cents, current price $68, 15% return on collateral.

 

I also did merger arbritrage on sprott inc buying sprott resource holdings but unfortunately, the short opportunity in the acquirer died a few days ago and there's no options on it.