ViacomCBS: Fasten Your Seatbelt And Prepare For Takeoff

Summary

• We are following up on our previous ViacomCBS article, with the stock undergoing a wild rollercoaster ride since.
• We are sharing our historical trades and strategy in conjunction with the stock's rise and nosediving.
• In line with our conviction that the stock is greatly undervalued, we are selling puts offering annualized up to 232%, preparing for the possible take-off ahead.
• We have once again assembled a win-win situation, regardless of the stock's future movement.
• This idea was discussed in more depth with members of my private investing community, Wheel of Fortune. Learn More »

The Context

In late January, we published an article going through our thoughts on ViacomCBS (VIAC)(VIACA) and how we were utilizing covered calls to assemble a win-win narrative. Since then, the stock had a wild ride, doubling in value before plummeting back down.

The stock has now returned to what we have expressed as attractive levels (below our PT) as Archegos Capital was forced to sell more than $20B in stocks last Friday, causing a massive sell-off.

Data by YCharts

Now, here's how VIAC now looks against its peer group:

PE Ratio (Forward): Only second to AT&T

PS Ratio (Forward): Most attractive

EV to EBITDA (Forward): Only second to AT&T, and about in-line with FOX

Data by YCharts

Dividend Yield: Second to AT&T

Data by YCharts

Our Strategy

Now, let's put everything in good order to review everything that we've done in conjunction with VIAC, as well as our current moves, preparing for the stock's eventual recovery towards our price target. For those not familiar, we explained why we believe VIAC is undervalued and deserves a higher price in our previous article.

• Phase I: Buying VIAC During Q1/2020

In light of our PT of $60 for VIAC, we bought VIAC in early 2020, and we've added throughout the first quarter along with the market plunge at the following prices.

Date	Price
01/21/2020	39.00
01/27/2020	35.00
02/20/2020	29.50
03/17/2020	12.51
12/31/2019	41.97

Click to enlarge

• Phase II: Selling covered CALLs

On January 25th, we sold covered CALLs on the entire long VIAC position. If all options get assigned, the weighted-average price we would get would be $64.60, above our PT of $60. This is the phase we discussed in our previous article, as mentioned earlier.

The trades were as follows:

Instrument	Allocation	Price	Date
VIAC 01/21/2022 50.00 C	Against 1/5 of long VIAC position	9.00	01/25/2021
VIAC 01/21/2022 55.00 C	Against 2/5 of long VIAC position	7.25	01/25/2021
VIAC 01/21/2022 65.00 C	Against 2/5 of long VIAC position	4.65	01/25/2021

Click to enlarge

• Phase III: Sell bearish vertical CALL spreads

Later on, we sold the following VIAC bearish vertical CALL spreads. This is a great, relatively safe way to make money when a stock is way overvalued on the one hand, and volatility is very high on the other hand.

VIAC bearish vertical CALL spread	Date	Price
SELL VIAC 65.00 01/21/2022 C + BUY VIAC 04/16/2021 80.00 C	03/05/2021	13.75
SELL VIAC 70.00 06/18/2021 C + BUY VIAC 04/16/2021 80.00 C	03/05/2021	8.00

Click to enlarge

The concept here was as follows:

1. If (or shall we say 'as soon as') VIAC moves back to its FV - there's money to be made here.
2. We sell a long-term expiry date, capturing as much premium as possible, thanks to the stock's high volatility.
3. We buy a short-term expiry date, wasting as little as possible money on protection. There's no reason to buy long-term protection when you believe that a stock is 50%-60% overvalued and due to pulling back.

Of course, we didn't expect the stock to fall 60% (from $100 to $40) in a matter of two weeks, but we did expect (or at least thought it's possible) for VIAC to lose 20-30% between March 5th and April 16th. Furthermore, if VIAC would have traded at $100 (or more) comes 4/16/2020, we would buy another short-term set of CALL options until there's no reason to do that. Luckily, it looks as if 4/16/2021 was the first and last date we need to buy to hedge these spreads.

• Phase IV: Sell the position with a hedge

On March 15th, when VIAC was trading around $100, in WoF we suggested the following:

• SELL (to close) VIAC (common stock) + BUY (to open) VIAC 6/18/2021 120.00 CALL for a NET PRICE/CREDIT of $90.

The reason we 'only' got $90 was the cost of the hedge (protective CALL). Once we sell the stock - all the covered CALLs mentioned earlier will have turned into naked CALLs. While we thought (and still think) that there's no reason whatsoever for VIAC to trade at $100, let alone $120, we know that in this market, there is a lot of manipulation (think GameStop), and stock prices can trade at levels that are completely disconnected from the fundamentals of the businesses they represent. Therefore, while this seems like a waste of good money - it's also money well spent.

• SELL (to open) VIAC 70.00 1/21/2022 PUT @ $10.00.

There are two ways to look at this trade:

First, another (closer) hedge to the covered-turned-naked CALLs. While the 120 CALL is capping the potential loss (if it gets to it), it doesn't prevent the exposure (from $50-65 to $120). By selling these covered CALLs, we reduce the exposure by $10.

Second, it's the first step back into the stock for a net price of $60. Since our updated PT (as of March 15th) has been $70 - there's no reason to fear a net price of $60 (as a re-entry level) when the stock is trading at $100.

Without complicating things too much, we can safely say that based on the current stock price, we've sold VIAC for >$100/share, and we're due to make a lot more on the stock through other trades.

Of course, this is only an interim statement based on the current situation. There's a long time to go for many of the options, but it's very likely that once the stock price stabilizes, and consequently volatility stabilizes, we would close most (if not all) of the open trades, locking these profits, and leaving very little (if any) exposure (aside of potentially owning the stock again, of course).

Now What?

Due to the high volatility - and based on our current PT - the best alternative is to sell deep-in-the-money, long-dated PUTs. If VIAC recovers - that would be the most profitable trade out of the ones available to us at this point in time.

Data by YCharts

Selling puts on a stock we believe is undervalued makes a lot of sense since we are happy to buy the stock at the current price (because we believe it will rise again in the future). Since the buyer of the put pays us the fee, we are essentially buying the stock at a discount.

The Trades

Three days ago, we executed the following trades, which offer annualized yields on the options from 74.97% to 103%. With both scenarios, we are quite happy once again. If the stock trades at or above the strike price, we will enjoy massive annualized yields. If not, we are assigned the stock and become Long at quite attractive price levels, below what we believe the stock is actually worth.

• SELL (to open) VIAC 01/21/2022 60.00 PUT @ $22.00

Source: Author

• SELL (to open) VIAC 01/21/2022 70.00 PUT @ $30.00

Source: Author

• SELL (to open) VIAC 01/21/2022 75.00 PUT @ $33.00

Source: Author

So far, VIAC hasn't traded lower than it had last Friday, but it hasn't yet recovered, which is a perfectly normal 'behavior' for a stock following what VIAC has been through in recent days, weeks, and months.

This is a classic 'consolidation period.'

And soon, the extreme volatility would subside, making the sale of options less profitable than it is these days.

Basically, we keep on doing the same thing we suggested (best investment alternative to tackle VIAC), and we keep doing it as long as the market is allowing us to get good deals (that you can bet we won't be getting in a month's time).

Here are the possible scenarios out of selling our latest PUT option:

• SELL (to open) VIAC 09/17/2021 75.00 PUT @ $32.10

Source: Author

To be (assigned VIAC at only $42.90) or not to be (assigned, and then make 232% annualized return)? - that's not the question. Because as far as we are concerned, there's no question about the viability/worthiness of this trade.

Just as the stock shoot up too much, VIAC has now gone down too much. We believe that from the low $40s, the stock has 50-60% upside potential based on our PT, even if only to catch up with its peer-group (and benchmark) performance.

Analyst’s Disclosure: I am/we are long VIAC, VIACA. 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.