Mateo Blumer

Long/short equity, value, long-term horizon, macro
Mateo Blumer
Long/short equity, value, long-term horizon, macro
Contributor since: 2011
Company: Flohr Asset Management
Thank you six-oh :)
Great analysis. Kudos on your predictions about ARCP swallowing up Red Lobster properties!
steve_t - I only opened significant short positions during the 3rd week in July, using put option spreads on ES e-mini futures. Before that, I was 100% long, having closed out of a big Alcoa (NYSE:AA) call options position over the previous 2 weeks. I had no short positions in the years preceding July 2014.
On the ES e-mini, I bought puts at the 2,030 strike (at $100.70), and sold puts against them at the 1,800 and 1,930 strikes (for $24 and $55, respectively). All with December 19 2014 expirations. On August 5th, I sold half of my long 2,030 futures puts, and bought back all of the short puts, realizing a small short-term loss. Minutes later I covered my remaining long 2,030 puts by selling 1,990 Dec 19 puts against them, at $114.50 (which is $14 more than I paid for the long 2,030 puts), putting me in a position where I have a guaranteed profit at expiration regardless of where the market is. This is net of my short-term loss on the 1,800 and 1,930 puts I had sold and then bought back.
I'm still holding my bearish put spread on SPY with a January 2015 expiration. Same for RSP (except, for RSP, I covered my long $35 March '15 puts after the market had gone down significantly, rather than entering into the long/short spread at the same time, as I had done with the SPY bearish put spread). I'm currently holding long positions on GLD, certain gold/silver/palladium miners, and a few random stocks that I consider to be bargains and ideal targets for acquisitions.
Overall, if all the underlying securities in my portfolio decline by 20-30%, I stand to make substantial returns. In the event that the underlying securities all rise by 20-30%, I will lose a little money, but only a fraction of what I'd make in the bear scenario.
Overall, I expect to see some kind of correction before year end (hence most of my shorts are 3-6 month options positions), and then a more sustained bear-market or downturn in the years to follow (explaining why I'm holding 2016 call options on precious metals miners and a long stock position in GLD).
Thanks Snoopy44. Not trying to be "doomy and gloomy" - just trying to present the most important facts and interpret them from an objective standpoint. This is actually the first article of mine that takes a marked bearish stance rather than a bullish one.
"Remember, I am neither a bear nor a bull, I am an agnostic opportunist. I want to make money short- and long-term. I want to find good situations and exploit them."
I actually dislike Cramer quite a bit, but this quote of his I agree with wholeheartedly.
I think it's pretty entertaining when people get so emotionally invested in their positions that they resort to lobbing insults rather than actually listing facts or offering analysis. It is this kind of playground behavior that causes bubbles.
And to those calling me anti-Obama - I'm a libertarian who voted for Obama. Too many Republicans these days - especially those from the Tea Party wing - are embarrassments to what (in this economy) should be the stronger political party. The ideal Republican in my eyes is Jon Huntsman.
Thanks James likewise. I agree that the $470s might be good as a cover. A few months ago I entered into a January '13 $450 / $400 bullish put spread, and closed out a few weeks ago at nearly 60% of my maximum possible gain. A similar idea would be to enter into a longer-term OOTM put spread, like a $525-470, and then close out of it after a rally or positive earnings release. I've found that you can often reach 50% maximum profitability long before halfway between start date and expiration.
Agreed. There is a ton of nonsense about "declining iPhone demand in emerging markets" - go to Shanghai or Hong Kong and tell me the iPhone is not immensely popular. Apple has consistently issued guidance 12-18% BELOW actual earnings.
You are preaching to the choir Mr. Wesley. Great article, I couldn't agree more.
I like your OOTM Put write play here, but I agree with Chad2...Even though I'm betting AAPL will end up well above $522 come August 18, you would be a lot safer (and able to leverage significantly more) if you backed up each short $525 put with, say, a long $500 or $510 put.
James, you raise a good question here. In short, it definitely depends at what time you wrote the calls. Let's say we did write some Jan 13 $600 strike calls against our long stock, either Friday or today (Monday July 23rd). If we wrote them on Friday, when AAPL was around $610, we could have sold each call for $60 per share.
However if we waiting until the next trading day, Monday, we would have ended up selling the same option for more like $52 - representing an $800 difference from the prior day because the stock had gapped down.
To answer your q, I would guess that if AAPL gaps up to $630 Wednesday opening bell, and then closes at around $615, the day's price range for the Jan '13 AAPL $600 calls would be $55-75. So yes, you might see an unrealized loss on your short calls of $15-23 dollars per share ($1500 - 2300 per contract). However, this loss would be greatly offset by the underlying stock's increase in value. So, if you can become comfortable with the fact that you are capping your maximum gains on this strategy to $5,000, with a break-even point of $550 and a max profit achieved at $600, then you might enjoy the strategy.
As far as prudence, writing an OOTM bullish put spread can be a more conservative play - I do this all the time. The one thing is that if the paired puts are too far out of the money, then the net credit (short put premium less long put premium) ends up being pretty small relative to the maximum loss - creating a "pennies in front of the steamroller" possibility. My suggestion is to initiate such OOTM put spreads when the stock is down temporarily, like it was this am.
Though one can make the case that DECK was a "market darling", there have been serious and fairly obvious red flags for quite some time that led me and others to short the stock back in May. As of May 24, the float short of DECK was 22.3% - hardly a reassuring reason to keep "averaging down". DECK has been attempting to change the structure of its product distribution model by adding company-owned retail stores, a terrible (and capital intensive) decision considering the fact that sales have been dropping and the company is selling a decreasingly popular product that many would prefer to purchase online. UGG boots - which in 2011 accounted for 87% of DECK's revenue - are not as cool as they once were, and many girls are preferring to purchase similar, cheap knockoffs sold everywhere from Walmart to Costco. This shows an enormous sensitivity to and reliance upon a questionable product.
Their forecasts have also been equally questionable - in May they forecasted 14% EPS growth for 2012, despite the fact that Q1 2012 revenue vs. Q1 2011 revenue for UGG boots was down 9.2% in the ecommerce channel.
Moral of the story - just because a stock is a "darling" and is being propped up by institutional managers (who have an incentive to hype it up and attempt to drive it up in order to support their existing positions) and clueless investors - doesn't mean that many of these people have a logical thesis for investing in the company, or that the company is for some reason going to do well moving forward. I do believe in dollar-cost averaging - but not when the company in question is selling an increasingly unpopular product (that makes up the vast majority of its revenue) while at the same time investing in more company-owned retail stores at a time when more and more consumers are purchasing online.
Vertical integration would have been valuable for DECK earlier on, while they were on the come-up, but I now see it as a recipe for failure.
Thanks Fred, it really is a fascinating historical phenomenon. I actually read your "Sell in May" article the other day, definitely inspired me! I'll soon post one about my specific ES futures option strategy for hedging against/capitalizing upon the decline I expect over the next few months
Good point and thanks for the insight, I agree that tracking error presents a potential problem, especially if you are utilizing only TBT for this interest rate play. Nevertheless, in the event of a rapid rise in long-term rates or a flight out of Treasuries to riskier assets, the losses incurred due to tracking error in TBT would represent only a small portion of the potential returns.
But as this IS a long-term play that may take time, I do agree that relying exclusively upon TBT options for this trade would be excessively risky. Instead, investing a portion of your allocation for this play in TBF or DLBS - as opposed to investing all of it on TBT options - would be a much safer bet, as you wouldn't lose too much in either of these in the event of rates staying the same. If you have $100k for this trade, a good allocation might be:
40% TBF
30% DLBS
10% TLT (short)
10% TBT options
10% TLT bearish call spread
I agree that TLT put options would be the best thing with regards to efficiency and tracking error, but premiums are pretty high; a January 2014 $120 TLT put costs $15, meaning TLT would have to drop to $105 just for you to break even. I would also say to utilize TBF options, but strangely, liquidity in TBF options is far lower than in TBT, to a restrictive extent. Also, options are not available for ETNs like DLBS. Perhaps I will post a follow up article!
Looks like I took some faulty advice on that. Thanks for the help :) How different would it be if the options had the same expiration? I was under the impression that, as long as your naked options are covered at the current time, your margin would be substantially lower.
I completely agree - this strategy is definitely not for beginners, and if at any time you're short a put and don't have it covered (either by a long put or short stock), you are putting yourself in s very risky situation, especially in times like these. But rolling over a (now almost worthless) December '11 $370 put into a Jan $370 is doable for most moderately-experienced traders in my book. AAPL is now trading around $390, so we're sitting pretty on this one thus far!
Yes indeed I have - using put spreads is one of my favorite ways to make bullish (net-long) investments in stocks. Even if a stock's price doesn't move while you hold short puts against it, remember you're still making money from the time erosion of the option's price. You do have a maximum gain and loss from this strategy, but many appreciate that sense of predictability. I wouldn't, however, use this strategy for stocks with low (<$5- 10) prices, for stocks with thinly traded options, nor for stocks with particularly low volatility (and thus lower options premiums). Let me know how it works for you :)
The definition I get when I google 'covered put definition' is: "the writing of a put option while simultaneously shorting an identical amount of the underlying." I do agree, however, that adding a long call to this scenario is a great way to mitigate the risk of the stock shooting up.
Yes, that's right. I'm essentially saying that, due to most brokerage requirements, you must have sufficient cash to back the sale of a naked put in the event it is exercised. Some brokerages certainly have laxer margin requirements, so this might not be true everywhere. But by definition, as you point out, a naked put is one that isn't backed. Good catch!
Good point Mitch, I could have made that clearer. I did mention that, in implementing this strategy, one would have a "maximum gain, equal to the put option's premium" - so if you sell a put and the stock goes up 100%, you still won't make more than the option premium.
Debs - thanks for catching that glaring mistake...put options give the buyer the right to SELL. I will try to submit a correction.
I was under the impression that a "naked" put is an uncovered short put...but you do present a very good question of what happens if the short call option gets exercised, and you are forced to sell the stock. From this point, there are two ways to go: in the even that the stock is called - meaning it has probably gone up - you can try to close the put option, recover any remaining value in it by selling it, and then try to re-enter into the strategy completely anew. The other option would be to keep the long put, and then re-purchase the stock and re-sell the call.
This strategy is far from perfect, and given the relatively low volume in IVR options, at certain times the strategy will have a zero or negative expected P/L (inclusive of dividends) as a result of skewed options prices. As I mentioned in the article, conversion arbitrage - buying long stock, and then selling a call and buying a put with the same strike price - is best implemented when call options are overpriced relative to puts. Given the recent downward momentum in the stock's price, put options at this point in time may be overpriced relative to calls.
The way I see it, the stock price risk is separate from the risk of dividends being cut - using conversion arbitrage or some variation of the strategy, if done correctly you have neutralized price risk. That just leaves the risk of the dividend remaining, and in that regard, I completely agree that we are "doubling down on the dividend" in a way - the strategy almost certainly won't post a profit if the dividend is cut completely. But, also like you mentioned, it's hard to see these stocks (or their dividends) falling much further over the next 6 months than they have as of late.
As for the impact of transaction costs, an excellent question: I use use Interactive Brokers ( , where transaction costs for stock trades and options trades are incredibly (<$0.25) low, and I treat the costs as essentially negligible. However, if you are using a more typical brokerage such as Scottrade, Schwab, or e-Trade or something of that ilk, the trading costs (especially the cost of trading options) will dig into your profit, so definitely be aware of that as well.
I agree with you here. This is something definitely to be cautious of.
What do you think about First Solar's cadmium telluride (CdTe) technology? "Currently 90% or so of crystalline silicone production uses industry-standard equipment/technology, and none of the leading Chinese module makers possess meaningful IP." (Morningstar). Does FSLR have a leg up here?