Financial Velociraptor

I opened a diagonal spread on Celgene (CELG).

music selection:  “A Stroke Of Luck” — Garbage

Celgene is an excellent candidate for a diagonal call.  It is stable with gushing cash flows and robust growth ahead of it due to a stocked full pipeline of promising drugs in Phase III trials.  I’ll leave breaking down the financials and valuation strengths to the Seeking Alpha types.  But I’ll also note there is a lot of meat on this tasty looking bone.  The diagonal call allows me to get leveraged exposure to that upside while earning an acceptable return on the deployed cash while I wait.  It also lowers risk as I have less capital deployed than on a simple written put or covered call strategy.

The diagonal call strategy is a spread composed of a long dated long call purchased deep in the money and a near dated short call sold somewhat out of the money to capture leveraged premium while leaving room for leveraged upside price appreciation.  The short call can be rolled repeatedly for additional income and to expand upside price appreciation potential.

I bought CELG190118C00055000 for 78.90 a share.  Going as deep into the money as possible maximizes my leverage in terms of cash deployed while minimizing the time value on the option which is a drag on long term returns of the long call.  Since shares are trading for about 132 dollars right now, I have about 40% leveraged exposure to upward or downward movement in the price of the underlying.  That is the primary reason for opening the diagonal call.

Since the above call is deep in the money, I effectively control 100 shares of CELG.  Writing a call against such a position carries no more risk that writing a call while owning the shares outright. In fact, it carries lower risk because less capital has been put at risk.  In the event of a bankruptcy, for example,  My loss is 7,890 instead of 13,200.  The lowered effective basis also provides leverage to the covered call position.  About 40% in this instance, thus allowing a lizard to write out of the money calls and still earn a good return on invested capital.

I sold CELG170922C00139000 for 1.28 a share.  The trade will be in force for 39 days and yields 15.18% annualized.  At the same time, there is room for 5.22% upward price appreciation in the shares during the holding period.  With the provided leverage, this would be a 8.75% gain on invested capital.  The hope is to capture a small amount of this potential appreciation and roll up six weeks for now to continue capturing price appreciation with leverage.

You may be wondering what the catch is.  It is simply that the long call has about 1.83 in time value on it.  It is a certainty this $183 will decay to zero by expiry.  The beauty of the setup is 128 dollars of this time value will be recovered in a little under 6 weeks.  The trade should then be producing a net profit in terms of time value while still providing leverage on the upside.

Devour your prey raptors!

I sold the UVXY puts.

music selection:  “Between Love And Hate” — The Strokes

weigh-in:  205.2 +0.2

I originally purchased UVXY190118P00020000 on 8AUG2017 for 10.25 a share.  Volatility soared shortly thereafter on international tensions with North Korea.  I was able to sell today for 11.24 a share.  The trade was in force for a scant 6 days and yields and enormous 587.56% annualized.  For sure, this is not going to be very repeatable but you have to take big gains when you can get them.  I’ll be waiting for volatility to calm down a touch before re-establishing a position.

In other news, Avis (CAR) passed its stop loss of 18.05 on Friday.  I sold today for 18.79.  The position had 223 shares outstanding and basis of 5,929.61.  Proceeds were 7,825 for a net loss of 1,895.46.  The trade was in force for 308 days and yields negative 37.88% on an annualized basis.  It has been hard to be short lately but I am sticking to my guns.

Devour your prey raptors!

I hit my stop loss in HTZ at yesterday’s close.

music selection:  “Fell In Love With A Girl” — The White Stripes

My stop loss for Hertz (HTZ) was set at 18.05.  Shares closed over that price Thursday afternoon.  I still believe in the thesis but I’m going to honor my stop.  I bought to close all 554 shares at 18.79 for a cash outlay of 10,409.66.

My loss is 2,409.36 on a basis of 8,000.30.  That is a loss of 30.12% or 36.04% annualized.  The trade was in force for 305 days.  I am still in CAR, AMG, F, GM, COF, CNQ, S, and SC short positions.  Time will tell the tale.

Devour your prey raptors!

My short position in HTZ took it on the chin today.

music selection:  “Hologram” — Katie Herzig

I have shorted 554 shares of HTZ for a total “cost” basis of 8,000.30.  The thesis is subprime auto lending is creating a bubble in used car prices.  Since car rental companies can largely be thought of as leveraged plays on used car pricing, they are a good way to short the used car segment.

HTZ reported earnings today and it was a big whiff.  They missed EPS by a mile and fell short on the top line too.  Almost inexplicably, the market sent shares up 23% on the news.  There is another news item that seems to be in play.  Uber is getting out of the car leasing game and is pushing drivers with poor credit towards car rental companies recommending that lease older model rentals on an hourly basis.  The market thinks this could save the car rental companies from being ravaged by weak used auto pricing.

In total, I am down 1,733.48 on the position or 21.67%.  I still believe in this short but I will honor a 25% hard stop.  I’ll buy to close if shares close above 18.05.  They are 17.57 as of this writing.

CAR moved up in sympathy but only about 5%.  I have a lot more room to run in that short.  Also, I am sticking with my GM and F shorts.  Uber’s decision seems to offer little solace to the big automakers.  In addition, I have a short position in COF which is partly driven by their aggressive subprime auto lending.  Crashing used auto prices wipes out their collateral and puts them at risk.

Devour your prey raptors!

I rolled my UVXY puts to a lower strike.

music selection: “Hologram” — Katie Herzig

I originally purchased my puts at the 13 strike (pre-split) on 14FEB2017.  I paid 8.20 a share.  I sold today for 9.15.  The trade was in force for 175 days and yields 24.16% on an annualized basis.  I have two other UVXY trades closed this year for 26.92% and 65.43%.  That brings my average annualized returns to 38.84%, which is a really good result.  I ordinarily do this with a 10% allocation in my portfolio so I am adding around 388 basis points to the portfolio on the year.

I bought new puts, this time for a reduced 8% allocation.  I paid 10.25 a share.  I bought 24 puts at the 20 dollar strike for $24,600.  Target return is 50% annualized.  I will be looking for more hedges in coming weeks.

Devour your prey raptors!

I tried to close UVXY today but couldn’t find a buyer at an attractive price.

music selection:  “Planet Caravan” — Pantera

weigh-in:  205.0 +0.6

We have gone a long time in this bull market with a correction of at least 10%.  Perhaps, it is a record length of time.  Measures of investor complacency such as the VIX are at record lows.  I think it is time to play a little defense.

Except for three positions in oil and gas that I entered with larger than normal trailing stops, everything is at a 25% trailing stop loss.  Today, I updated my spreadsheet to calculate a 15% trailing stop loss.  Nothing was triggered for an immediate sale.

Most of my short positions are currently in the red but I’m holding them open.  They should perform well when the inevitable 10% or larger correction finally arrives.  I am also being strategic to raise cash.  When I unload my UVXY puts, I’ll redeploy at a 8% portfolio allocation instead of 10%.  I want to have some dry powder to write puts with when the correction comes as steep (irrational?) risk premiums will be on offer.

In the meantime, I am well positioned to play defense.  Approximately 40% of the portfolio is in fixed or semi fixed income type positions.  Another quarter or so is in strong dividend payers.  My projected twelve month dividends, distribution, and interest income is 27,254 or 110% of my projected budgetary need.  I’ll continue collecting some modest options trading income, but now is not the time to go all in with selling options as the remarkably low VIX is suppressing premiums.

I hope to be back tomorrow with a successful UVXY trade.  Depends on finding a willing buyer.

Devour your prey raptors!

The month of July is in the bag.

music selection:  “Desire” — Lemmy Kilmister & Richie Kotzen

weigh-in:  204.4 (2.0) – w00t, new record low.

ASSETS:

Wells Fargo (taxable): This finished the month at 31,443, up from 30,941 last month.  The account is up 2,309 on the year or 7.93%.

Interactive Brokers (taxable): This finished the month up 1.89% at 306,652.  The account is up 37,126 on the year or 13.77%.

Interactive Brokers (tIRA): This one was up 3,088 dollars to 152,775.  Gains for the year come to 12,558 or 8.96%.

Checking: Cash on hand is up 676 dollars to 12,259.  The change in cash since the beginning of the year is 3,816 or up 45.20%.

Total Liquid Networth is up 9,994 on the month to 503,129.  I broke the half a million milestone!  Total gains for the year are 55,809 or 12.48%, which annualizes to 21.39%.

LIABILITIES:

No real changes here.

Home – Paid

Car – Paid

Income tax liability is still tracking around 11,000 for the year and I should have that much prepaid by the January 15 deadline.  If the market kicks me in the teeth on any of my long or short positions, I’ll take my lumps and harvest the tax loss to reduce this burden.

WITHDRAWAL RATE:

I am budgeting 25,000 for annual spending.  Against a liquid networth of 503,129, my withdrawal rate is 4.97%.  Under 5% for the first time!  Projected twelve month dividends, distributions, and interest come to 27,524 or 110.09% of budget.  I picked up an additional 1,812 in options income for the month.  I’m averaging 2,080 a month or 99.85% of expected budget.  My budget is covered more than twice before considering the effect of any capital gains.  A nice place to be in.

SPENDING:

Expenses came to 1,696 for the month.  This is slightly better than my 1,711 average so far this year.  My road trip with Dad has been postponed to September and I’ll incur some additional expenses during that time but it shouldn’t be too bad.  National park fees are covered by Dad’s senior citizen benefit and we’ll be splitting hotel fees.  That should be offset by no air-conditioning expense for the home as I’ll flip that breaker to the OFF position for the duration of the trip.  Should finish the year under budget barring any unforeseen major expenses.

Devour your prey raptors!

I bid on six trades and completed four.

music selection:  “Gemini Dream” — The Moody Blues

weigh-in:  206.4 (2.8) – A good week.

Six positions expired over the weekend.  I was able to reestablish four but two more offered no attractive bids.  PSEC and ORCL both expired out of the money and left me with an opportunity to write new puts.  I was unable to find a bid that allowed for my minimum 12% annualized return on put writing. I’ll move these two to the watch list and look for better opportunities in the future.  I have four covered call trades to share with you instead.

SM Energy has disappointed but I’m working to make the trade profitable.  I sold SM170818C00022500 for 10 cents a share.  The trade will be in force for a short 26 days.  It yields 6.24% annualized.  After this trade, I am down 19.73% in the trade since inception.  I’ll need some stability in the market for WTI crude to make a full recovery.

Shares of CNNX were narrowly assigned over the weekend. I sold CNNX170818C00020000 for 55 cents a share.  Like SM, the trade will be in force for only 26 days.  It yields a tasty 38.61% annualized.  The underlying yields over 5% but it is a 50/50 proposition at this point whether I will actually collect a distribution before being called away.  The call yields are compensating me plenty well enough though.

Archer Daniels Midland (ADM) is another trade that has been disappointing.  Shares moved against me almost immediately after opening a position and have been slow to recover.  I sold ADM170901C00045000 for 15 cents a share.  The trade will be in force for 40 days and yields a paltry 3.04%.  All in, I am now only down 4.47% on the trade in total.  A break even result is highly achievable.

EOG has been treating me pretty well.  This is a best in class shale driller in the Permian Basin of west Texas.  They should remain profitable down to a WTI crude price of 35 a barrel.  I sold EOG170901C00095000 for 2.20 a share.  This trade will be in force for 40 days and yields a desirable 21.13% annualized.  This position is 6.79% in the green after accounting for options premiums received.  I should be able to play this one profitably for months.

All together these four options trades yield a simple average annualized return of 17.25%.  I think that is pretty good considering half the positions have moved against me and I’m still handily beating the long term average return of buy and hold index investors.  It leaves me puzzled that so many people think indexing is the only rational strategy.

I’ll be taking a road trip vacation to the mountain west with my father, Lizard King Sr, next week.  Further blog updates will be highly dependent on finding reliable Wi-Fi.

Devour your prey raptors!

Capital One reported earnings and the markets are cheering.

music selection:  “Sign of the Gypsy Queen” — April Wine

I hold 61 shares short of COF in my main investment account.  The basis is a little over 5,000 dollars.  Yesterday after close, Capital One reported quarterly earnings and surprised to the upside.  Shares are up over 8% on the day.  I am now 328 dollars to the red.  I will continue to hold the short until 102.70 (a 25% hard stop).  I think I am still right about deteriorating credit quality in the auto loan and credit card loan books and that I am just “early” to the party.

Zacks had this to say: “increasing expenses continue to hurt Capital One’s profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.”  It should be noted that COF actually increased its provision for loan losses in response to growing default rates.  Net charge offs have increased 66 basis points year over year.  All this while deposits held at the bank fell 1%.  If this trend continues, Capital One could face a liquidity crisis that will reward shorts well.

Devour your prey raptors!