Strangling Macerich

Summary

• I would, figuratively speaking, like to strangle the management of Macerich (MAC), but that is not what this article is about.
• Instead, this article describes my current positions in MAC options, which together form a “strangle.”.
• My strangle is entered from a perspective very different than one finds in standard descriptions.
• If you are willing to take on more shares at a lower price, and to sell some of those you already have at a higher price, a strangle may be for you.
• I do much more than just articles at High Yield Landlord: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

At my core, I am a value investor. My general preference is to do little with options.

In fact, my only options right now are all options on Macerich (NYSE:MAC) stock. In particular, I have ended up with what is called a short strangle.

This article discusses the way I think about this position. It is not quite the way one reads about it.

Background on MAC

If you are reading this, you likely know that Macerich is a mall REIT. They hold some of the best malls in the United States, measured by sales per square foot.

The MAC portfolio is concentrated in highly urban areas with high incomes. They have evolved it over the past decade to be even more that way. If malls have a future anywhere, and I believe they do, the MAC malls are among the best positioned.

Like all malls, MAC has faced the need for a lot of redevelopment during the recent years of transition in retail. I’ve discussed this in previous articles, most recently here.

But, in the process, MAC mismanaged their finances. They ended up too exposed when the pandemic hit and, by my calculation, reached the point of a covenant violation.

Worse, they had no shelf registration in place, so they could not sell shares when the stock price rocketed above $20 during the Reddit-driven mania in January, centered on GameStop (GME). And all of this was after turning down a buyout offer at $95/share in 2015.

Data by YCharts

To get out of the mess they created, Macerich management sold 40M shares at much lower prices, and it seems likely they are now selling more. I expect to end up diluted by 33%.

You can see why, figuratively speaking, I would like to strangle their management.

That said, by getting out from under their credit revolver on the backs of their shareholders, MAC has completely eliminated any near-term risk of further covenant violations leading to a Chapter 11 bankruptcy filing. There is a long-term value play there.

MAC's Funds From Operations, or FFO, should return to at least their 2019 levels, which were depressed. If you believe that they will at least come close to that, then even after the dilution, MAC is worth a multiple of their present price.

But with that management, among other factors, one cannot view this as a low-risk outcome.

My MAC Options

Despite shedding some of my shares in ways discussed here, my MAC holdings entering 2021 were still larger than would have been my preference. The GameStop mania let me sell some of them at $20.

I bought some of those back at $17 when it looked like the Reddit macarmybets group might manage a short squeeze with MAC shares. Here is one of their memes.

Source

I ended up holding 2/3 of my early 2021 shares. But really my preference would be to shed half of those.

With this in mind, I sold MAC calls in two phases. I sold January 2022 $25 calls at $1.39 and bought them back at $0.71 11 days later. Then I sold January 2022 $15 calls at $1.88.

If the price rises and my shares get called away at $15, my effective price will be $17.56. Good enough.

On the other hand, MAC has been so volatile that it would be no surprise to see it drop well below its present price of $12. The lower it goes, the more compelling it becomes.

Prices have risen so much since March 2020 that there are far fewer compelling places to put cash. So I used some cash to support short puts.

I sold some January 2022 $10 puts for $1.59. I may sell more, but only if I can get more money for them. If the price drops enough, I will end up holding additional shares at an effective price of $8.41 or less.

From there, the reasonable value is at least a triple and probably more. So, I would be fine with that.

If the price ends up between $10 and $15 next January 21 and I still hold those options, I will have made annualized returns well above 20% on the committed funds. I will also still hold the MAC shares I would like to shed at some point.

The Short Strangle Aspect

Formally a short strangle involves selling two options on the same stock, with the same expiration date. One sells a call with a strike price above the present price and a put with a strike price below the present price.

The standard picture of the gain from this kind of position is shown here:

The standard story is this. One gets the option premiums so one has that much profit so long as the stock price stays between the two strike prices. Traditionally, this makes the short strangle profitable if the stock is NOT volatile and the price stays in that range until expiration.

If the stock price rises above the strike price of the call, one has to turn over those shares, assuming the call is covered. One then “loses” the difference between the price in the future and the actual share price.

The websites describe this potential loss as “unlimited”. But it is not really a loss. It is a foregone gain.

The thing is this: if you would cheerfully sell shares you hold at that strike price, you don’t care.

If the stock price drops below the strike price of the put, one will be forced to buy those shares at that price. As the price drops further, one loses more and more money, at least on paper.

The websites describe this potential loss as “substantial.” But that is the risk of buying any stock at all.

The thing is: If you would be happy to buy more of the stock at that lower strike price, you don’t care.

The upshot is this. If you hold some shares that you would not mind selling for somewhat more than the present price, and if you would cheerfully buy more shares of that same firm at a lower price, then the strangle may be a perfect fit.

Substantial or unlimited losses be damned.

A Bit More Disclosure

For full disclosure, I should add that I also hold some January 2022 $30 calls that I bought in early 2020. I wrote about why here.

During the GameStop mania, I sold enough of those to recover 3/4 of my investment in them. So, I am pretty close to playing with house money and we will see whether they pay off.

I did not mention these calls earlier as they are not part of the story of the strangle.

Applications for You

You can see the circumstances where a strangle might work for you.

First, you would like to sell shares you own in some firm if the price were to rise sufficiently. Second, you would like to buy more shares in that firm if the price were to drop sufficiently. You have the cash to cover the puts.

That’s all it takes.

Analyst’s Disclosure: I am/we are long MAC. 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.