Seeking Alpha

Portfolio Update And Trade Ideas

by: Big Alpha Research

Strategy evolved to focus on yield cash flow from option selling.

Potential investments into gold miners and royalty companies as well as medical building REITs for the yield given the lower interest rate environment.

Banking on value in auto-manufacturers like GM and BMW.

Portfolio Highlights

Towards the beginning of the second quarter of 2019, I began to invest in technology stocks with options exposure to earn cash flow from these counters. I am also long Amarin Corp. (AMRN) as a long term position but pared down my long equity position in exchange for options that trade post Adcom date in mid-November. I hold on to long position through a put option written on The Gap Inc. (GPS). Finally, I recently added Total SA (TOT) and ING Groep N.V. (ING) as long positions to hold as well.

Other long positions through writing options include:

Adobe Systems (ADBE), BMW (OTCPK:BMWYY), BNP Paribas (OTCQX:BNPQF), Square Inc. (SQ), Nvidia (NVDA) and Uber Technologies (UBER).

From the list above, Uber and Nvidia are speculative bets while I am assessing the long term potential and merits of establishing an outright long position in Square Inc. (SQ).

I have bought put options on the Invesco QQQ ETF (QQQ) and SPDR S&P500 ETF (SPY) which expire in June 2020.

Portfolio composition:

Since my last portfolio update in December (article here), I have maintained $50,000 in equity position, pared down P2P lending substantially to $50,000 after loans matured, and am now holding largely cash. This is for a $300,000 portfolio, so do adjust accordingly towards a $100,000 portfolio if it helps.

Portfolio strategy and next steps:

I will be building on upstream gold companies and have started researching. Also looking into REITs for income generation as the yield seeking gathers momentum. Will ideally like to deploy 10% of this portfolio including leverage.

The ideal portfolio weight is in equity (and equity derivatives) to make up 40% of the portfolio and 20% is in REIT and bonds or bond-like instruments. 10% in gold and precious metals through producers or royalty-companies rather than outright positions. I will also allocate 5% of the equity portfolio towards protecting against a massive correction through put options. The balance is cash which I am looking to get short term yields through P2P lending (will continue to pare that down from $50,000 to $30,000) and fixed term deposits.

Out of the money put options

I am earning cash flow through writing deeply out of the money put options on auto-manufacturers BMW (OTCPK:BMWYY) and General Motors (GM). Both companies are trading at low earnings multiples and have struggled because of the trade war and a difficult environment for consumer discretionary items.

The BMW (OTCPK:BMWYY) trade is a short term and rolling position where I renew upon expiry. My current trade expires soon in September, and it is to write a put option at EUR52 strike price for EUR0.23.

General Motors on the other hand is a trade I am happy with which has a strike of $20, GM now trades at $38.80 and this option expires in June 2020. I entered this option at $0.29 (current is about $0.16).

Another deeply discounted company (in my opinion) is The Gap Inc. (GPS). GPS has been facing challenges recently, and 2019 is expected to be a tough year. During the first quarter earnings call, management at times gave me an impression that they were not on top of the situation and could not present a comprehensive strategy to overcome declining profits because of margin compression. The trend persisted into the second quarter as well. However I do find the company to be undervalued and have written options at $16 expiring in December 2019.

I have also written in the past about my Square Inc. (SQ) trades and these have been short term, trying to stay nimble as the share price has been extremely volatile. At $58 however, I find value fast approaching and will likely pick this up eyes closed if it declines another 15%. In the meantime, I changed strategy on SQ to sell options at $35 strike instead, expiring in January 2020. This yields lesser (I sold them at $0.27) but it takes away the active management necessary and was a significant part of my learning on technology stocks.

Similarly, I sold ADBE at $200 strike and NVDA at $125 for the same reasons. These are significantly out of the money options. For short dated options, I still have an ADBE position that has a strike at $250, expiring in October. That is about 10% below current prices.

Biotech stocks

Amarin Corp (AMRN) was my personal favorite. Only my 3rd multi-bagger ever (I am still learning and hope to do better), but I do like the idea of reinvesting a small portion of my AMRN gains (now in cash) towards small biotech stocks which are binary in nature. They skyrocket or implode.

The strategy therefore was to switch out of my long position in AMRN and to buy options instead. I purchased March 2020 call options with a strike at $15. The price paid was $3.60 funded by partial divestment in AMRN. I now still hold a small equity position and am looking to fully divest and switch out into options. Those will be sold only when there are worthwhile biotech stocks to rotate into.

Concluding ideas

The market has been choppy and I have learned a lot from this experience. Truly enjoyed the experience and learning. As a result of this choppy 2019, I had a roller coaster ride with Square Inc. (SQ) and Tenet Healthcare (THC) of which I had to pivot strategies and finally exited from THC. In each of these counters, I learned a lesson about being thorough in figuring strategies, and building knowledge. I admit I do not do a deep dive in research, but I take a small position first to immerse myself in the nuances of each investment idea or company. That keeps skin in the game and keeps me motivated to learn more about the company.

With that in mind, I am now looking at gold mining companies or companies earning a fee from such operations. One potential is Wheaton Precious Metals (WPM) and Barrick Gold (GOLD). Related to my healthcare theme when investing in Tenet Healthcare (THC), I am now looking at healthcare infrastructure operators that are structured as REITs for yield.

I realized I have to be more disciplined in my updates and regular. This is for personal accountability as well and I commit to a monthly update going forward, so there is more to come in my next update!

Disclosure: I am/we are long AMRN, BMWYY, ING. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long all the positions mentioned in this article

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.