Author Topic: How to think about options?  (Read 11860 times)

no_free_lunch

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Re: How to think about options?
« Reply #30 on: April 21, 2013, 11:18:21 AM »
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Shortly after they came in the money I sold them, and lost out on the vast amount of gains to be had two months later.  Shorting stocks is extremely difficult to do well and consistently, and becomes even tougher when you handicap yourself with expiry dates. 

Maybe the lesson is to wait until they either: a) expire or b) hit some predetermined multiple.   E.g. in my case, I knew it was possible for them to go to 10-20x (by looking at previous cases), so I should have set a 10x target from the get go (back in January 2008 I think).  I guess the point I am trying to make is occasionally, like all assets, puts can be under-priced. 


twacowfca

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Re: How to think about options?
« Reply #31 on: April 21, 2013, 11:47:38 AM »
Quote
Shortly after they came in the money I sold them, and lost out on the vast amount of gains to be had two months later.  Shorting stocks is extremely difficult to do well and consistently, and becomes even tougher when you handicap yourself with expiry dates. 

Maybe the lesson is to wait until they either: a) expire or b) hit some predetermined multiple.   E.g. in my case, I knew it was possible for them to go to 10-20x (by looking at previous cases), so I should have set a 10x target from the get go (back in January 2008 I think).  I guess the point I am trying to make is occasionally, like all assets, puts can be under-priced.

Yes. OTM puts didn't exhibit the strong "smile" pattern then and were in fact a bargain in any prospective milieu other than a benign normal distribution.  :)
« Last Edit: April 21, 2013, 01:31:41 PM by twacowfca »

Uccmal

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Re: How to think about options?
« Reply #32 on: April 21, 2013, 02:23:30 PM »
Quote
Shortly after they came in the money I sold them, and lost out on the vast amount of gains to be had two months later.  Shorting stocks is extremely difficult to do well and consistently, and becomes even tougher when you handicap yourself with expiry dates. 

Maybe the lesson is to wait until they either: a) expire or b) hit some predetermined multiple.   E.g. in my case, I knew it was possible for them to go to 10-20x (by looking at previous cases), so I should have set a 10x target from the get go (back in January 2008 I think).  I guess the point I am trying to make is occasionally, like all assets, puts can be under-priced. 

Yeah, easier said than done. 
GARP tending toward value

GrizzlyRock

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Re: How to think about options?
« Reply #33 on: April 22, 2013, 04:36:55 AM »
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My point is that massive share repurchases dramatically increase per share value on a level that is wholly unaccounted for by route option pricing and especially stabbing at implied vol for multiple years.

I'm not sure that repurchases should affect the options pricing that much.

A company can do a few things with its profits:
A- Buy back shares.
B- Re-invest the capital.
C- Issue dividends.
D- Pull an Apple and sit on a big stack of cash.  (Apple is essentially the world's biggest hedge fund.)

A and B will cause more volatility in the business than D.  C will reduce the value of the call options, unless the company dividends it out all at once and the options get adjusted (in which case C is almost the same as D).

I think the big picture is that 1-2 years of profits don't make that big a difference.

Where DTV is unique is that it takes on very high amounts of leverage (and continues to increase it).  Lots of leverage should make the business highly volatile.  If you think that stock prices will track fundamentals over time, then high leverage should make the stock volatile.

WRT buying back shares it doesn't change the volatility of the "business" in terms of core competencies, revenues, operating profit etc.  Rather share buybacks change the volatility of the share price as the EV of the biz is calculated over less shares.  This divergence is precisely what is not captured in option pricing.

I'll sign off this thread.

locatevalue

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Re: How to think about options?
« Reply #34 on: April 26, 2013, 01:01:11 PM »
You guys are debating the stock/company again, not discussing using options.

I have some experience with options and have thought a bit about the Apple situation in this regard.

Some thoughts and experiences:

Successes:
a)FFH leaps - We, collective we (this message board) knew the issues with FFH as much as anyone.  We knew that the issues were getting behind them when we first initiated Leap positions.  The Leaps were a way to lever the return to value.  It was not based on FFh actually growing but surviving.
b) AMEX, SB, GE, WFC - all Longest Leaps - As above - a survival story or return to value.  If these turned against me I would have had my house, a little cash, a job, in a severe depression.
c) BAC, WFC, JPM, AIG - return to value in all cases.  Proxy for common to add leverage

Failures:
1) Trying to duplicate FFh success with smaller companies - I have done it enough times to know to stay away.
2) Rim - Buying Leaps, Selling puts - I got hammered.  In this case I would call it fighting the tape. 
3) Buying puts in general.  This never seems to work very well.  I still use them, strictly as insurance, accepting ahead of time that I will probably lose, but they serve a purpose.
4) Selling puts.  There are better ways to earn income - buy WFC, or SSW instead.  Unless you really want the stock at the lower price.
5) Buy and hold, either on purpose, or through forced holding (liquidity dries up).  example: MFC options.  Options are for trading.  The only time I have ever exercised them is with FFH.

So what can I learn from all this. 
1)Return to value situations work best
2) If an option hasn't moved into the money when the next Leap cycle ensues I get rid of it completely.  For US investors, this will mean waiting your one day plus a year to get your tax loss.  Revisit your situation and buy more leaps or take your losses and stay away. 
3) Lock in my gains as soon as The next cycle comes out, subject to tax issues.  Basically, get rid of buy and hold mentality.  Buy more at the time limit Leaps if upside still exisits on stock. 
4) Dont sell puts unless I want the stock at a new improved price.
5) Only buy puts as insurance, not to make money.

To the Apple situation directly:

Ask yourself how many times in history you have seen a high flyer regain its value quick enough to make money on your Leaps?  If Apple reports weaker than expected earnings, meets expectations, or even slightly exceeds them the stock will stay down.  What is the chance something will materialize to take it back up to $500.  To get to $500 in 1.6 years you need something big.  Will this happen in that time period?  Are you willing to eat %100 on your position?  If these are all acceptable to you then by all means go ahead.  Otherwise stay with the common, or in my case none at all.  I am not willing to fight the tape, Yet!


Thanks for sharing it, I never bought any options because of my buy and hold framework till it reaches IV and was never sure about timing.With more experience my probablity of predicting timing is improving so want to wet my feet with small percentage in options and this would be really helpful, I leared a lot from Eric on options which got me intrested in it by the way!

Yours Truly

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Re: How to think about options?
« Reply #35 on: April 26, 2013, 02:28:45 PM »
I don't know a damn thing about options/leaps but Uccmal, thanks for your candor, much appreciated!

Yours Truly

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Re: How to think about options?
« Reply #36 on: April 26, 2013, 02:47:07 PM »
For those discussing DTV, can you advise why you are referring to John Malone? I don't believe he nor Liberty-companies have any ties with the company anymore.. Per CapitalIQ, he does not own any shares nor is on the board.. neither is his #2 man, Greg Maffei

He may be gone but the current CEO, Mike White, is definitely using a play from Malone's playbook of leveraging to buyback shares while being undervalued..

LC

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Re: How to think about options?
« Reply #37 on: April 28, 2013, 04:18:23 PM »
For those discussing DTV, can you advise why you are referring to John Malone? I don't believe he nor Liberty-companies have any ties with the company anymore.. Per CapitalIQ, he does not own any shares nor is on the board.. neither is his #2 man, Greg Maffei

He may be gone but the current CEO, Mike White, is definitely using a play from Malone's playbook of leveraging to buyback shares while being undervalued..
As well as reducing his tax bill.
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scorpioncapital

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Re: How to think about options?
« Reply #38 on: May 06, 2013, 08:23:08 AM »
I sold some put options today on a stock at a price 24% below the market price. Expiry is in 2 months (!). The premium I asked for shows as an instant profit because. Namely, buyers seem panicky. What does it mean in this kind of situation? Was it a short squeeze and people are covering or they assume an incredibly volatility, or it's a scheme to drive down the price over the next 2 months? The stock had a huge jump in the last 2-3 weeks, something like an increase of 20%....