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Two Unrelated LEAP Put Sales (CHL and V)

|Includes: China Mobile Limited (CHL), V
Summary: On 12/28, and 1/5, I sold long-dated puts on Visa Inc. (ticker symbol: V) and China Mobile Ltd. (ticker symbol: CHL), respectively. The positions consist of the following: (i) sell 3 January 2012 50s on CHL for a net credit of $3,630, and (ii) sell 2 January 2012 80s on V for a net debit of $2,250. In connection with the sales, the brokerage account reserved $6,330.60 and $4,367.60 respectively, which will increase or decrease depending on the underlying price movement of the stocks. Note that for simplicity's sake I record my return on investment (or IRR) assuming that the amount of reserved cash for each position stays static from the moment of sale. I'll also report IRR using the entire amount of cash required upon exercise as opposed to just reserved cash.

CHL Rationale: Similar to my Nike put sale which I wrote about on 12/27, the CHL puts were in-the-money at the time of sale, but are now at-the-money. As of today, the price of the puts will decrease at close to a .5 to 1 ratio with an increase in the price of the stock. The puts carry a substantial amount of time value (around $9.6 per share) - resulting in time decay which will expand nearing expiration. Instead of purchasing the stock directly, I've chosen to maintain a good amount of downside protection over the next two years (break-even at about $40.4 per share as of today, or 19% below today's closing price - note that this calculation ignores CHL's dividend), free up capital through the use of zero-cost leverage while maintaining a substantial amount of upside on CHL in the event the stock price increases substantially in a short period of time. As the largest telecom provider in China with the government's backing, CHL is a terrific business and has grown substantially and consistently over time. It generates an enormous amount of cash, which increases each year as China's population becomes wealthier and adopts modern technologies, and trades at a very reasonable multiple of its earnings (about 12x trailing earnings). Fortunately, given general market discomfort with China, the puts carry a substantial premium. The worst-case scenario for the position - an effective purchase price of CHL of $40.4 per share in two years - would most likely represent an opportunity for a solid investment going forward.

Visa Rationale: Note that unlike the CHL and NKE puts, the V puts are out-of-the money. Due to a substantial increase in the price of the stock, the stock's volatility, and the overhang of some large litigation, V puts also carry substantial premium. Nevertheless, V is an exception business - a capital light, "toll-road" model, with enormous international growth potential as credit and debit cards become more ubiquitous globally. By selling the long-term puts, I can target a much cheaper effective purchase in two years (roughly $69.5 per share, or about 19% below today's price), or capture time decay in the event V continues to increase or stays flat. I have little doubt that V will continue to be a market leader in a growing industry over the medium to long-term.


Disclosure: Long V and CHL