Author Topic: The perfect trade  (Read 5699 times)

Cardboard

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The perfect trade
« on: October 03, 2019, 08:23:14 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

« Last Edit: October 03, 2019, 08:24:49 AM by Cardboard »


Foreign Tuffett

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Re: The perfect trade
« Reply #1 on: October 03, 2019, 08:33:25 AM »
The rationale for this trade idea is almost completely backwards-looking, but the stock market is forward- looking.

Castanza

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Re: The perfect trade
« Reply #2 on: October 03, 2019, 08:41:45 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though.

Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe.

Although I haven't been doing it strictly on BAC.
« Last Edit: October 03, 2019, 09:24:51 AM by Castanza »

clutch

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Re: The perfect trade
« Reply #3 on: October 03, 2019, 08:49:52 AM »
Another strategy completely based on hindsight.  :-\

Cardboard

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Re: The perfect trade
« Reply #4 on: October 03, 2019, 08:52:15 AM »
"The rationale for this trade idea is almost completely backwards-looking, but the stock market is forward- looking."

Well I agree with you and don't expect this to repeat forever and as I mentioned hindsight is 20/20.

However, how do you solve or get out of the low interest rate situation? Forward looking today is that they are going down. A year and a half ago, they were supposed to go up.

It seems to me that this situation or tug of war will go on for a long time with weak economic growth and lots of debt around the world.

In the meantime, valuation is low and the business keeps on getting stronger over time. So it becomes a fight between the low interest rate headwind, valuation for bank assets and a growing business value.

Point is that buy and hold does not seem adequate here. If you like such stocks, then it is only the fear of missing out that prevent you from getting out at the top of the range which is pretty clear for all of them.

Gregmal

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Re: The perfect trade
« Reply #5 on: October 03, 2019, 08:58:19 AM »
Another strategy completely based on hindsight.  :-\

Another strategy based on buying a starter position in a quality company perhaps at prices slightly higher than one would like and then either making some quick money or then build into it at lower prices. Seems like a way to make money. Some people don't like to make money I guess

muscleman

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Re: The perfect trade
« Reply #6 on: October 03, 2019, 09:00:59 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

This is absolutely the wrong way to think about it. If you don't have a stop loss, then you are risking 100% of the capital to make 11%. It could make you feel good but you have to be right 9 out of 10 times just to break even. Sooner or later your portfolio will be filled with failed BACs, each down 50%-90%, and no cash in your portfolio. (Who would have thunk of GE going down that much last year?)

You can do technical analysis and trading instead of FA, and it works, but it definitely won't work in the way you described it.

I am muslceman. I have more muscle than brain!

Gregmal

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Re: The perfect trade
« Reply #7 on: October 03, 2019, 09:06:48 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

This is absolutely the wrong way to think about it. If you don't have a stop loss, then you are risking 100% of the capital to make 11%. It could make you feel good but you have to be right 9 out of 10 times just to break even. Sooner or later your portfolio will be filled with failed BACs, each down 50%-90%, and no cash in your portfolio. (Who would have thunk of GE going down that much last year?)

You can do technical analysis and trading instead of FA, and it works, but it definitely won't work in the way you described it.

And in that case he'll have plenty in common with all the buy and hold value investors who would inevitably ride BAC to 0 as well...

LC

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Re: The perfect trade
« Reply #8 on: October 03, 2019, 09:28:53 AM »
The way I think of it is like this:

First, you have a fair value which you believe BAC is worth.

Lets say you think fair value or intrinsic value etc. is $35/share, well then you are buying at 77% of FV and selling at 85% of IV.

So I agree with Cardboard this sounds like a pretty decent strategy (or as he put it, one could do much worse). And I think it can be generalized and improved in two ways:

1) Limit this to companies you would 'buy-and-hold'
2) Expand this to multiple companies because really you taking advantage of volatility
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writser

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Re: The perfect trade
« Reply #9 on: October 03, 2019, 09:28:58 AM »
Cardboard you are a very smart trader. Using your concept I started looking for similar situations. I think I found an even better one: buy Microsoft at $137, sell at $139. You could have done that about six times the last two months. So that would be around 1.05^6^6 = 68% annualized. That seems even better. The only risk is that you get stuck with a very high quality company below $137, or risk further upside above $139.

Of course if there is a calamity then Microsoft could go bankrupt or be down a lot but Bill Gates would probably bail out the company. Also, if there is a calamity, what would happen to the rest of the market?

While I know that hindsight is 20/20, I think that one could do much worst than trying this out. Especially with all the brokers going to $0 commission it seems like we can make a lot of money here. Many thanks for your idea. Do you have more suggestions? I'm looking forward to a fruitful discussion.

Writser
« Last Edit: October 03, 2019, 09:33:15 AM by writser »
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