Everybody remembers John Kerry's apparent flip-flop. During the 2004 Presidential campaign he was chided at every turn for saying: "I actually did vote for the $87 billion before I voted against it." As part of the American electorate, we were led to believe that this whole charade actually mattered. In fact, for more than a year, both political parties conditioned us to believe that changing your mind or holding two conflicting opinions concurrently was akin to not just being a moron, but, worse-yet, a freedom-hating traitor.
Maybe we can trace the problems some investors have with hedging to just another time when an election triggered an upswing in Google searches for "How to Move to Canada." (By the way, the first hit when you type in that question? Demand Media's (DMD) eHow. I guess Google's engineers still have some work to do).
I helped restart a frenzy over options expiration day, pinning, maximum pain theory, and mysterious subjects like delta hedging by claiming that you cannot blame manipulation every time your favorite stock falls. I hope my work on these subjects helps make them a bit less murky. Over the course of my research, I have learned quite a bit.
While I understand why retail investors wax skeptical towards institutional money, I think the cynicism often borders on a blind mix of misinformation, bitterness, and paranoia. For every expose that you'll find in, say, Scott Patterson's excellent book, The Quants, dozens, if not hundreds of hedgies exist in a straightforward, even boring world of trades that only sizzle because of the massive dollar amounts attached to them.
Proof of this comes in SEC Form-13F. Institutional money managers with more than $100 million under their watch must file this form with the SEC on a quarterly basis. Gigantic hedge fund SAC Capital filed theirs just yesterday. While reviewing their most recent holdings, as of March 31, 2011, I compared them to what they reported in their previous 13F, good through the end of 2010.
This peak into filings most investors tend to ignore -- but probably should not -- doesn't say much about options expiration-related issues, but it does show how large hedge funds construct their portfolios. I think it's instructive to take a look at several examples. For the record, I do not list all stocks that SAC owned or owns a simultaneous stock and option position in.
In several instances, you'll see SAC Capital was long at the same time it was short. While Form-13F does not require disclosure of short positions, money managers must report all long positions, including long stakes in put options, which effectively represent a short position in the underlying stock. This exercise will also reveal how SAC's interest in big name companies changed between the end of Q42010 and Q12011. What we don't know is how the long option positions reported were used in conjunction with a long or un-reported short position in the underlying stock or options.
Abercrombie & Fitch (ANF) At the end of 2010, SAC reported holding 345,399 shares of ANF. It complemented this position with 450,000 call and 150,000 put options, most likely with $57.50 strikes. The 3-to-1 ratio between calls and puts could indicate level of bullishness or have something to do with short positions we do not know about it. Fast forward to the end of March, 2011, and SAC notes 335,453 shares of ANF, but no long option positions.
Aetna (AET) SAC disclosed a 121,245 share long position in AET at the end of 2010, accompanied by 100,000 puts, presumably with a strike price of $30. At the end of March, 2011, SAC reports no long options positions in AET and a 103,216 share stake.
Amazon.com (AMZN) As 2010 ended, SAC owned 184,581 shares of AMZN with presumably off-setting call and put positions of 100,000 contacts each, likely at the $180 strike. As of the end of Q12011, SAC had almost halved its stake in AMZN; the hedge fund is left with 99,544 shares and no options positions.
Apple (AAPL) SAC reported a hefty 876,458 share lot in AAPL at the end of 2010, alongside 125,000 calls. SAC has substantially trimmed its reported long position in AAPL with a mere 253,255 shares to report at the end of March, 2011, and no options stakes.
Baidu (BIDU) A 152,133 share position in BIDU presumably worked in concert with 100,000 call contracts at the end of 2010. By the end of March, 2011, SAC only counted 30,447 shares of BIDU.
Best Buy (BBY) At the end of 2010, SAC owned 53,306 shares of BBY. Interestingly, it appears to have upped the ante substantially in the first quarter of 2011. As of yesterday's report, SAC claims ownership of 2,387,199 shares of the retailer and 2,729,400 call contracts. Before you assume a covered call position, remember that firms do not have to report any short positions on Form 13F.
BJ's Wholesale Club (BJ) SAC made similar moves with BJ as it did with BBY. At the end of last year, SAC held 1,138,620 shares of BJ compared to 2,838,600 shares and a 205,000 contract call position, as of the end of March 2011.
Coach (COH) As we rang in 2011, SAC owned 140,808 shares of COH as well as a 200,000 contract position in what could have been $55 strike puts. Those puts would have likely performed well at the end of 2010 before COH went on a run in 2011. As of the end of Q12011, SAC reports having upped its ante to 394,432 shares of COH and no long options positions.
Costco (COST) As of December 31, 2010, SAC owned 609,993 shares of COST. By the end of March, 2011, it appears SAC turned bearish cutting its long stock position to 16,919 shares and adding 100,000 put options.
EMC (EMC) At the end of 2010, SAC counted 756,200 shares of EMC as well as 300,000 contract stakes in calls as well as puts. By th end of March, 2011, SAC reported no long option positions in EMC and it cuts its long stock position to 188,512 shares.
H. J. Heinz (HNZ) At the end of last year, SAC held a massive 750,000 contract position in HNZ calls alongside a relatively modest 8,194 stake in the common stock. As of the end of March 2011, the hedge fund reports no options in HNZ, however, it upped the number of shares it owns to 45,037.
Intel (INTC) Along with a 511,211 share stake in INTC at the end of 2010, SAC also held 100,000 call options and 500,000 put options. On yesterday's report, SAC counts 317,759 shares of the common stock and an equal number of calls and puts at 400,000 apiece.
Microsoft (MSFT) SAC made a considerable move out of MSFT over the last two quarters. At the end of 2010, the hedge fund owned 2,301,951 shares of the common stock as well as 200,000 calls and 200,000 puts. By the end of March 2011, SAC slashed its MSFT position to just 220,795 shares.
Netflix (NFLX) SAC added a few shares of NFLX between Q4 and Q1, but still has a relatively small interest. At the end of 2010, SAC reported 6,440 shares of NFLX common stock as well as 50,000 call options, most likely with $175 strikes. At the end of March 2011, SAC owned 42,826 shares of NFLX and no option contracts. One explantion for the increase would be an exercise of NFLX January $175 calls, but Form 13F does not provide enough detail to know for sure.
Nvidia (NVDA) At the end of 2010, NVDA was one of the stocks SAC only had options positions in. SAC held 550,000 NVDA calls and 200,000 puts. At the end of March 2011, SAC reported ownership of 291,675 shares of NVDA common stock. It's quite plausible that SAC was able to exercise some of the calls it held in Q4 to build its Q1 position in NVDA.
J. C. Penney (JCP) At the end of 2010, SAC was active in JCP, reporting ownership of 276,330 shares, 650,000 call contracts, and 80,000 put contracts. While SAC could have enjoyed some of it, it likely missed out on JCP's most recent runs; the hedge fund reports no long interest, via stock or options, as of the end of March 2011.
Qualcomm (QCOM) SAC looks to have turned at least slightly bearish on QCOM. As of December 31, 2010, SAC reported a long position in 1,283,351 shares of QCOM as well as 300,000 call contracts. As of the end of March 2011, that stake dwindled to just 353,516 shares of QCOM common stock.
SPDR S&P 500 Trust ETF (SPY) Like many investors, large and small, SAC believes in buying insurance. At the end of 2010, SAC reported holding 1,950,000 SPY put options. Interestingly, yesterday's report reveals that SAC upped its put position in SPY to 6,197,700 contracts alongside a new 50,000 contact position in SPY calls. As far as a stake in the underlying ETF goes, SAC went from 264,039 shares at the end of 2010 to just 26,930 as of this most recent report.
Yahoo! (YHOO) Despite the second fiddle in search's problems, SAC has upped the ante. As of the end of 2010, SAC held 1,245,298 shares of YHOO common stock. By the end of March 2011, SAC had increased its position to 2,331,991 shares as well as fresh 500,000 contract position in YHOO calls.
*The SEC's Frequently Asked Questions list on Form-13F
Additional disclosure: Author may initiate a long or short position in AMZN, AAPL, BBY, or NFLX at any time.