A site that enables investors to insure their stock and ETF investments (including ETFs that track indexes such as the S&P 500 and the Dow Jones Industrial Average) against market downturns as well as company- and sector-specific risk with put options.
Why put options?
Only put options protect you against losses when stocks or ETFs jump or "gap" downward. Limit sell orders don't do this. For more on put options, and how they can be used to hedge your risk, see Portfolio Armor for individual investors.
How it works:
You enter your stock and ETF holdings, and the maximum downside risk you are willing to accept for each holding. Then, using its proprietary algorithm, Portfolio Armor shows you the optimal put options to buy to obtain the level of protection you want at the lowest price.
I mentioned on this on the Short Screen message boards earlier today, but I picked up a few DIA puts today when my limit orders for puts on a couple of distressed companies didn't get filled. If I knew Scott Brown would win as decisively as he did in special election for U.S. Senator in MA tonight, I might have waited a day.
I've been a little swamped today putting the finishing touches on Portfolio Armor, but here are a few quick updates on my put basket. Recall that in a post at the end of last year ("New short position: UAUA") I wrote,
With the Nasdaq near a 14-month high, and the VIX near a 14-month low, I have been building a basket of out-of-the-market puts on financially-distressed stocks drawn from Short Screen's screener1. Today's addition to this basket are the $6 strike, JUN 10 puts on United Airlines parent UAL Corporation (Nasdaq: UAUA), UALRK.X. I bought a few of these today at $0.40.
Those puts are now trading at $0.35 -- they dropped 12% last week a day before a report from Continental broke that moved the underlying stock higher1. UAUA was up ~10% today, but not enough to move my out-of-the-money puts again.
Virgin Media, another company in the put basket, priced a junk bond offering today. I wonder if some income-oriented investors are going to pick up long-dated puts on VMED now, with the intent of buying its junk bonds after the credit markets tighten and yields rise.
I mentioned this on Short Screen earlier, but I added a few out-of-the-money JUN 10 puts on TBSI to the basket today.
1Andy Swan has described options as the "'tells' of the underlying".
First, a request: if any of you know of a finance professor who is an acknowledged options expert and might be willing to consider a quick consulting project (shouldn't require more than an hour of his time), please e-mail me at contact[at]shortscreen.com. Thanks.
Now, on to some assorted updates and musings.
Sorry for the lack of posts over the last few days. I meant to post something last night, but after a late, gluttonous, feast at George's favorite New York restaurant (Balthazar) last night I was too beat to post or check e-mails when I got home. Before dinner, I had taken George to meet my developers at Simande. George is considering making some modest updates to his business's computer system (he's currently running it on DOS). I mentioned to the Simande guys that George first set up his system when Tronwas playing in the movie theaters. After a beat, Matt asked, "When did that come out, early 80's?". "Yeah," I replied. "That's when we were born," said Matt. For Matt, here is the trailer for Tron:
I believe a remake of Tron is in the works.
After leaving Simande HQ, we met George's old friend Frank at Balthazar. Balthazar is sort of an upscale version of the French Roast, but Balthazar has its own excellent bakery (located, conveniently enough for us, in nearby Englewood, NJ.). After a few bottles of Bollinger for the table, Frank, an actor/playwright, was in a feisty mood. He launched into some of the political arguments you might expect from a New Yorker, with gusto.
I remembered from meeting him on previous occasions that Frank had mentioned he was friends with Al Pacino, so in an effort to deflect him from politics, I asked him questions about Pacino's performance in Heat (e.g., Why was his character chewing what appeared to be a half-piece of gum throughout the whole movie? Why did he always hang up on everyone without saying "goodbye"?). We probably would have gone through less of the champagne (which was wasted on my palate; I can get heartburn just as easily from a $10 bottle of cava) if George hadn't ordered one of those multi-tiered shellfish appetizers for the table, which the waiters consolidated to lower tiers Tetris-style as we ate). In any case, it was a good dinner with good company, but I ate way too much. Balancing that out today by just having a piece of toast and some ginger ale for lunch. Onto some updates:
Investment stuff:
- AYSI.OB: Got a belated response today from the CEO re the e-mail I sent him when they filed the 10-K on 12/23. I'll post on that separately in a little bit.
- USEG: Up today on this news from yesterday about the latest positive well result from its Bakken deal with BEXP, and this news from today that it received its $1 million option payment from Thompson Creek related to the molybdenum project, and that Thompson creek has budgeted several million more dollars for preliminary work on the project this year.
- The United Airlines puts: These went against me a little this week, a day before Continental announced its positive results. Steady as she goes though. New blogs:
After e-mailing my logo designer's gal Friday asking her, essentially, "WTF?", she wrote back pleading technical difficulties and saying that if she could crawl into the computer and push the process along she would. The thought of her and him being sucked into a computer Tron-style and forced to play in one of the movie's Jai Alai death matches brings me a small measure of comfort at this point.
Update: Here are the details I didn't have time to write about earlier. Sorry about not writing this out earlier, but it takes me a while to write these posts, and I just didn't have the time to do that earlier today, so I posted that as a placeholder.
As I mentioned in a previous post, the biggest risk I see with Alloy Steel International (OTC BB: AYSI.OB) is, "a nasty exogenous event (e.g., a big fall-off in Chinese demand for industrial commodities1)". For companies that have options traded on them, you can of course buy puts on the company to hedge your position. How, exactly, to do that in an optimal way is what the next subscription-based site, Portfolio Armor, is about (Portfolio Armor isn't live just yet, but that's its logo above2). Portfolio Armor's proprietary algorithm tells you exactly how many of which put options to buy to give you the level of protection you specify at the lowest cost.
Of course, Alloy Steel doesn't have any options traded on it, so there would be no way to use options to hedge against any purely idiosyncratic risk, but there are ways to hedge against the exogenous risk. I thought about this last night and figured that a way to do that would be to buy puts on a steel company with significant exposure to China. Then I figured, instead of using just any steel company with exposure to China, why not try to find a financially distressed one? I found just such a company using the screener on Short Screen. To give me a rough idea of how many of which of that company's puts to buy to hedge my AYSI position against the specific exogenous risk I mentioned above, I e-mailed my developers at around 8:30 am, asking them to run the algorithm on the steel company I found. When I got the answer from them later, I went to pull up the option and learned that the financially distressed steel company had announced a secondary offering at around 9am today, and on news of that dilution the stock dropped more than 20%, and the optimal put contract spiked more than 50%. Too bad I didn't think of this a day earlier.
1That's the big question. We presented the positive view on China this post back in September, "China's new self-propelled economy", and the editors of the FT presented the scary view in this editorial last month, "The cost of China’s excess capacity". In a nutshell, the positive scenario: China's big stimulus this year has helped transition its economy to one fueled more by internal demand, in which case there should be continued growing demand for industrial commodities to build infrastructure in underdeveloped parts of China, manufacture first refrigerators for rural Chinese, etc. And the negative scenario: China's stimulus has been mainly hair of the dog, propping up an unsustainable status quo relying on massive trade surpluses that over-extended Western consumers can no longer support.
2Recall our discussion in this recent post of the initial challenges in coming up with this logo.
In a post earlier this month ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74. I sold half on 12/11 at $2.92 for a gain of about 390%. Today I sold the rest at $3.20, for a gain of about 430%. I'd send Buffetteer17 a nice bottle of scotch if I knew his address.
In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74. Sold half today at $2.92 for a gain of about 390%. Letting the other half ride a little longer.
Virgin Media (Nasdaq: VMED) caught my eye on the Short Screen screener last night. In addition to having an Altman Z"-Score in the distress zone, the company has been losing money for the last four quarters (though those losses have narrowed somewhat over the last three), and has a fairly high debt load (about $9.5 billion in net debt, versus trailing revenue of $6.6 billion and a market cap of about $5.5 billion). Despite that, its share price has rocketed up from a low of $3.76 back in March, to $17 as of last night's close1. A quick search on Twitter showed several bullish tweets on the stock over the last few days, based on its technical trends.
Since Virgin Media has options traded on it, I figured I'd buy puts on it instead of shorting it to cap my downside risk. I bought a few of the Jun 10 put contracts with a $10 strike price (NUDRB.X) this morning for 30 cents each.
1The shares of a number of financially distressed companies have had similarly explosive run-ups from their March lows, including one we mentioned here previously, BAGL.
Update: Perennial contrarian "Commodity" makes the bullish case for VMED in this comment thread on GuruFocus. He could be right, so if you're thinking of going long or short VMED, you may want to check out his comments first.
In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74 and they closed yesterday at $2.65, so they're up about 350% since last Thursday. So far, so good for Buffetteer17's idea. When to sell is another question.
I've mentioned the pseudonymous GuruFocus commenter Buffetteer17 before, noting that he is probably the savviest and most numerate of the commenters on that site. There's a lot more chaff than wheat on GuruFocus, but I usually read Buffetteer's posts with interest. He wrote this in a GuruFocus comment thread today:
According to the Sornette bubble detector formula, the gold price bubble is nearing a critical point, meaning there's likely to be a large correction in the next few weeks. I applied the formula to GLD price history going back to March and got several high quality fits, with an R-squared in the range of 92-94%. You can clearly see the faster-than-exponential price rise on a log price plot. The critical dates range from 11/27 to 12/4. I bought a few Dec 09 and Jan 10 put options on GLD as a lottery ticket.
At this point, a commenter mentioned the devaluation of the dollar as the cause of the spike in gold prices. Buffetteer's response:
Gold prices in dollars are going up super-exponentially, way too much to be explained by dollar devaluation. Maybe dollar weakness is an underlying cause, but the gold price is now disconnected from that. We're seeing herding behavior. The motivation seems to be buy gold because other people are buying it and the price is increasing.
As I noted in my own comment on that thread,
I had a related exchange with Aaron Edelheit, after he wrote a post saying people should get out of cash because of dollar weakness. My guess is that when we get the inevitable stock market correction, the dollar will rise as it did last time, and gold will drop. The longer term trends might be different, but that seems like the most likely near term scenario.
I piggybacked on Buffetteer17's idea here and picked up a handful of Jan 10 puts on GLD today.
Just a man with a man's courage.
Older comments are moderated so I am made aware of them.
Please note also that none of what I write here should be construed as investment advice. Please do your own due diligence and use your own common sense before making any investment decisions.
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