tag:blogger.com,1999:blog-5389144729834496735.post316756292109139562..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Create Your Own Apple StubUnknownnoreply@blogger.comBlogger51125tag:blogger.com,1999:blog-5389144729834496735.post-16635259676222761702013-05-26T19:39:33.123-04:002013-05-26T19:39:33.123-04:00Thanks, kk.Thanks, kk.Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-53247171457978544962013-05-22T09:25:36.531-04:002013-05-22T09:25:36.531-04:00Hi,
I don't know, actually. I haven't r...Hi, <br /><br />I don't know, actually. I haven't read an options book in ages, and there are many, many more books out there now than when I was reading up on this stuff. You can probably find enough stuff free on the internet too. <br /><br />For what it's worth, one book that the options traders used to read a long time ago was "Options as a Strategic Investment" by McMillan. Frankly, I find most of the strategies in the book not for me... I have no interest in butterflies, condors, christmas tree spreads and whatnot. <br /><br />Also "Options Volatility and Pricing" by Natenburg was good. <br /><br />There's a lot of stuff out there depending on how deeply you want to study options. CBOE used to have a pretty good book that was like an options study guide, but I couldn't find it on a quick googling. <br /><br />I would suggest just reading the reviews and ratings at Amazon on various options books... those would be more up-to-date reviews than what I can offer... <br /><br />Thanks for reading. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-89478818889837491102013-05-20T18:15:48.622-04:002013-05-20T18:15:48.622-04:00Hi kk,
Thanks for the explanation!
Btw, is ther...Hi kk,<br /><br />Thanks for the explanation! <br /><br />Btw, is there a (short) book you can recommend on all these delicate mechanics and reasoning about options? Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-38310301411177762772013-05-17T20:13:28.602-04:002013-05-17T20:13:28.602-04:00Hi, a discount usually means that it's a tight...Hi, a discount usually means that it's a tight stock to borrow. Since a synthetic forward (long call / short put) reflects the carry cost (interest expense minus dividends), if it is negative that usually means the stock borrowing cost is high. <br /><br />In that case, if you like the stock, you can buy it synthetically at a discount in the options market, but that also means that you can buy the stock and earn a good stock loan fee on it (to reflect the rebate), but individual investors might not get paid that... <br /><br />Thanks for reading and commenting. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-89793023527316932472013-05-17T19:22:39.845-04:002013-05-17T19:22:39.845-04:00Hi kk,
I'm trying to apply this logic on BBRY...Hi kk,<br /><br />I'm trying to apply this logic on BBRY. (No, there's no reason to leverage up such a speculative stock. Just trying to understand the mechanics.)<br /><br />Current share price is $14.62. Looking at $7 strike Jan 17, 2015. Calls offered at $7.95 and puts offered at $0.81<br /><br />So premium inclusive of put value = (7.95 + 7) - 14.62 - 0.81 = -0.48 <br />That is -4.11% p.a.<br /><br />What does it mean when it's negative? Does it mean such leveraged trade is so stupid that the market is willing to "pay" me 4.11% p.a. interest to carry it?<br />Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-42067539613749407152013-04-13T12:32:51.269-04:002013-04-13T12:32:51.269-04:00This is a fantastic website and I can not recommen...This is a fantastic website and I can not recommend you guys enough. Full of useful resource and great layout very easy on the eyes. Please do keep up this great work.<br /><br />best e cigs 2013http://www.tech-cigarette.com/the-best-electronic-cigarette-2013-to-choose-or-not-to-choose.htmlnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-80157924280349976522013-03-08T06:12:54.787-05:002013-03-08T06:12:54.787-05:00let me check ;)let me check ;)Anonymoushttps://www.blogger.com/profile/04676847240509582445noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-1995923850036330592013-02-19T07:45:30.755-05:002013-02-19T07:45:30.755-05:00Hi,
Well, thanks for trying. If you don't ...Hi, <br /><br />Well, thanks for trying. If you don't get it, don't worry. It's not that important. Many investors do just fine without touching LEAPs or anything like that at all. <br /><br />Thanks for reading. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-24924486475066091122013-02-19T02:44:26.900-05:002013-02-19T02:44:26.900-05:00Thank you for your prompt reply, I read the BRK po...Thank you for your prompt reply, I read the BRK post again but still do not completely get it: this extra leverage with the LEAP can be applied with the same arguments to any company. Be they leveraged or not is surely not the defining condition, what's important is if one judges the company to have certain positive potential upside with a reasonable bottom risk.<br /><br />So, I don't get this "Why would you do this? Because AAPL is very unlevered."...<br /><br />Thanks<br />Roy<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-60259079581435800802013-02-19T02:32:34.189-05:002013-02-19T02:32:34.189-05:00hey kk i am fully agree with you and damn sure peo...hey kk i am fully agree with you and damn sure people also like this. good and keep it up! <br />kekacase.com is also specialist for <a href="http://www.kekacase.com/design-your-own/custom-case-for-the-kindle-fire.html" rel="nofollow">Custom Kindle Fire Case</a>.Anonymoushttps://www.blogger.com/profile/04676847240509582445noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-38568182610341274712013-02-18T22:29:31.809-05:002013-02-18T22:29:31.809-05:00I just want to clarify my 4% carrying cost is a ho...I just want to clarify my 4% carrying cost is a holding period rate. The annualized rate would be approximately 2%.Charles Hwangnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-4942518199954369932013-02-18T07:34:02.138-05:002013-02-18T07:34:02.138-05:00Hi,
This is riskier than just owning the stock, ...Hi, <br /><br />This is riskier than just owning the stock, of course. Why would you do this? Because AAPL is very unlevered. So the point is that you add leverage to the position yourself synthetically. <br /><br />It doesn't have the same risk/return profile of the WFC trade that Greenblatt talks about, though. <br /><br />If AAPL paid out the cash on the balance sheet as a special dividend and the investor bought other stocks with it, in a good market, the AAPL shareholder will make more money than if AAPL held onto the cash. This is what some AAPL shareholders want. They want the cash to be put to work or paid out in some way. <br /><br />The point of this post is that an investor can do that synthetically via a LEAP. The return profile is not exactly the same, of course, as if AAPL paid out cash. But the investor can take cash out of the AAPL stock position and put it to work just as if AAPL paid out a dividend. <br /><br />I wrote about recapping Berkshire Hathaway so it's a similar idea to that one. In that post I talk about why you would do this on BRK: <br /><br />http://brooklyninvestor.blogspot.com/2012/10/recapitalizing-berkshire-hathaway.html<br /><br />Thanks for reading / posting. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-7169112884084442582013-02-18T06:24:22.446-05:002013-02-18T06:24:22.446-05:00Hi There,
Lovely post as always.
I understood th...Hi There,<br /><br />Lovely post as always.<br /><br />I understood the technicality of using the option as a financing tool but did not understand WHY it should be used in this case.<br /><br />Greenblatt puts a lot of stress on risk:reward. <br /><br />"With a call option, you can't possibly lose anything below $250 as you are only long a call option that becomes worthless (if AAPL goes below $250 and stays there). "<br /><br />That "only" would cost $211. If the market crashes, this will indeed turn to 0 while owning the common will not, even at $100. You could then sell it after the crash and buy something which is much cheaper. In a sense, then, the common also hold some of the "cash option" value.<br /><br />Not sure if I made much sense, just trying to understand WHY it's worth it to make the stub in this case, the risk:reward looks rather bad. I don't think this is something Greenblatt would do but what do I know...<br /><br /><br /><br />Thanks again!<br />RoyAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-31066104272299597902013-02-15T09:02:07.375-05:002013-02-15T09:02:07.375-05:00Hi, I think a lot of people were disappointed that...Hi, I think a lot of people were disappointed that Buffett didn't really back up the truck during 2008-2009. But I think he was being conservative... The stock portfolio was down, his short puts were going against him etc... So it's not surprising that he was cautious and didn't just plunge in head first. He's not a nimble hedge fund anymore but a big conglomerate/insurance company. <br /><br />And yes, I think there is a 10% limit on his holding of banks. A quick look at Yahoo shows that the ownership percentage was 8%; this may be due to the financing done during the crisis and maybe due to the Wachovia acquisition (diluting his holding)...kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-35525580298509789822013-02-15T01:11:13.180-05:002013-02-15T01:11:13.180-05:00Yes, the dividend risk adds a little less than 3% ...Yes, the dividend risk adds a little less than 3% to the carrying cost. Since there's still a lot of warrants outstanding, my bet is that WFC will not increase their dividends beyond $1.36 per year(at least for the next 2 years). I'm sure you already know but if they declare a higher number, they need to adjust the warrants. Thus, the total carrying cost should be approximately 4%.<br /> <br />Your analysis is spot on for WFC and very thorough. <br /><br />It looks like Warren Buffett added to his position. I was surprised he didn't do it sooner at lower prices. Is he maxed out at 10% of the company due to regulations?Charles Hwangnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-57940678032481893492013-02-14T15:36:15.368-05:002013-02-14T15:36:15.368-05:00Hi,
Thanks for the comment.
Yes, it can work ...Hi, <br /><br />Thanks for the comment. <br /><br />Yes, it can work with WFC very well too (be careful of dividend risk, though, as LEAPs adjust for extraordinary dividends but not ordinary dividends which can get hiked a lot from here for the banks). <br /><br />I have done this with BAC, C and it size with BRK last year and it has worked out really well. I don't intend to make a post about every situation, though, as they are all basically the same trade. (unless, of course, I have something specific to say about the underlying). <br /><br />Thanks for reading. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-82963063178465272922013-02-14T15:06:47.741-05:002013-02-14T15:06:47.741-05:00I really enjoy reading your blog. Thanks for shar...I really enjoy reading your blog. Thanks for sharing your knowledge.<br /><br />Have you thought about applying your Apple stub strategy to WFC call options? Depending on the option, the carrying cost is about 1-2%.<br /><br />Charles Hwangnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-9055756774824972462013-02-12T07:31:43.196-05:002013-02-12T07:31:43.196-05:00I think you are right, it might be higher.
We can...I think you are right, it might be higher.<br /><br />We can look at this in simpler terms. Suppose Apple will trade at the current price of $480 at the time of issuing prefered, then the total value of stock price and the prefereds would still be approximately $480.<br /><br />Apple stock price + Value of Prefered share = $480 (approx)<br /><br />If prefered share is valued at $300, then Apple share will be valued at approx $180.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10166946438210138802013-02-12T03:34:11.763-05:002013-02-12T03:34:11.763-05:00but if the preferred traded at $300, the potential...but if the preferred traded at $300, the potential dividend yield if ever paid out would be 6.7%. So it would likely not trade at such a low value.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-46603785652843685722013-02-11T23:40:16.300-05:002013-02-11T23:40:16.300-05:00Einhorn proposes Apple to distribute $500B to shar...Einhorn proposes Apple to distribute $500B to shareholders as prefereds @ 4%. <br /><br />I see this as IOUs. <br /><br />Apple's EPS reduces by $20/share since they are paid out as dividends on preferds. So the Mcap comes down based on the reduction of EPS and the value of prefered in the open market. If prefereds are distributed on 1:1 (1 prefered for 1 share held)basis and carry a face value of $500, and say they trade in the open market at $300, then Apple share may come down to less than $100/share. <br /><br />But, Einhorn shows $500B in balance sheet which does not exist, why? This is just financial engineering with smoke and mirrors.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-56300649074518002942013-02-11T22:40:58.837-05:002013-02-11T22:40:58.837-05:00he did return 7.9% in 2012 after Apple dropped fro...he did return 7.9% in 2012 after Apple dropped from 705 to low 500s which is one of his bigger holdings. And that is after December i believe alone dropped him 4.7% (correct me if i'm wrong, i don't have the shareholders letter in front of me). <br /><br />On Apple, I worked at a firm where we used DCF models, but it became apparent to me the main flaw of DCF. besides trying to project 5-10+ years out, is that we assume that cash is actually the shareholders cash! But apple does nothing with it, small acquisitions here and there that they try to keep under wraps, but essentially the shareholders cash is returning what 1-2% a year in interest? My bet is that if they decide to allocate more FCF to buybacks and dividends, they will jump back up to at least 550+. Then once they have a quarter with 40%+ GM again, it will shoot over $600 (I can imagine the sell side reports now, GM improving, Q1 GM one-time event BUY TP $750).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-35536967825862582962013-02-11T10:47:36.512-05:002013-02-11T10:47:36.512-05:00Well, I don't want to rush to judgement here, ...Well, I don't want to rush to judgement here, but Einhorn did propose this same structure last May when the stock was doing fine. <br /><br />I don't think Einhorn is the type of person to do something to divert attention. In fact, if he is doing poorly (2012 was not a great year), he is just calling more attention to himself. <br /><br />Anyway, I understand your viewpoint for sure. This looks like some short term, one-time bump that has nothing to do with improving the value of AAPL as a business. <br /><br />On the other hand, this is how our system works. Shareholders have a stake in the company and they are allowed to make their views known to the board, management and the public (why not?). <br /><br />Then the shareholders can decide via voting their proxies etc... <br /><br />I think this sort of thing is what makes U.S. capital markets the best in the world. <br /><br />I may not agree or disagree all the time, but I love that this sort of thing happens. <br /><br />As a sad contrast, look at Japan. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-64323481904070305912013-02-11T10:42:05.168-05:002013-02-11T10:42:05.168-05:00Hi, yes, it will change cash over time. A preferr...Hi, yes, it will change cash over time. A preferred is just a promise to pay out cash over time. And yes, it's doesn't change the value of AAPL as a firm; just the cap rates of the respective pieces of issued security; the common stock and preferred. <br /><br />As for changing the P/E ratio, I don't know. I suppose it should theoretically. But then again, what would happen to the P/E ratio if AAPL paid out cash? Theoretically, AAPL would become slightly less sound balance-sheet-wise, but I sort of doubt the P/E would contract due to that as long as AAPL keeps printing money the way it is. <br /><br />Anyway, for me, this is more of an interesting intellectual exercise than anything. I'm not pounding the table here demanding that AAPL issue preferreds or anything like that... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-52476310057665290082013-02-11T10:29:17.630-05:002013-02-11T10:29:17.630-05:00Good points (all of the above from both post and r...Good points (all of the above from both post and response). I think Einhorn's (I am not advocating preferreds; just explaining Einhorn's view) idea is that it will allow AAPL to retain the cash on the balance sheet (which of course will be paid out over time via the preferreds to some extent), and the market values a steady stream of income higher than tech stock earnings. So it is financial engineering. <br /><br />But I agree that anything to do something intelligent with the cash would boost the stock price. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-2015047733792117852013-02-11T10:25:38.885-05:002013-02-11T10:25:38.885-05:00Bingo... And we have a winner.
1. Dividends dont ...Bingo... And we have a winner.<br /><br />1. Dividends dont help out employees (as much... Though there will be some price appreciation due to signalling affects) = like it or not, this is an objective for Silicon Valley<br /><br />2. Stock buybacks are more tax-efficient<br /><br />3. When your stock price implies a FCF yield of 20% (inverse of 5x P/E) and you can borrow at <5%, you should be buying back stock all day long (assuming you think earnings are sustainable)<br /><br />4. Borrowing against foreign-cash is highly tax-efficient and is done by companies all the time. Rate will be higher than 2%, but it'll still be low.<br /><br />Anyway, this is all hypothetical since I don't think they'll do any of this = there's no evidence that Tim Cook turned into Henry Singleton over the last 3 months. They're still going to be conservative.<br /><br />That said, this could easily be a $1,500/sh stock if they did a modest levered recap.Anonymousnoreply@blogger.com