2013 In the Rearview Mirror – Part II

Earlier this week we took a look at the public calls we made for the first half of 2013. Today I’ll cover the last half of 2013. Let’s take a walk down memory lane.

Before I do that however, I owe our readers an apology. As I was working on this summary, in my provisional data collection, I mistakenly recorded Brad’s returns in error. I said that Brad’s returns were a whopping 540% – in just 3 months! Upon further, careful review I realised that the good ole’ decimal place had got the better of me! My bad. Brad’s Trade Alerts are up a “mere” 75% over the past 3 months. On an annualized, compounded basis the returns are tracking at 937%. Still unbelievable, but not the 543% over a 3-month period that I indicated.

So, again sincere apologies. Now read on to see exactly how we did with the rest…

August 2, 2013

Trade: Buy Turquoise Hill (TRQ)

TRQ came under pressure from the political upheaval surrounding the Oyu Tolgoi project in Mongolia. We felt buying at a time when the news media fueled shit-storm was in full swing made sense given the fundamentals behind Mongolia and TRQ. TRQ was trading at $4.51 at the time.

How we did

Crikey our timing on this was nothing short of shocking. Who would have thought that the Mongolian bureaucrats would proceed to do everything in their power to jeopardize the most important project the country has? All in an attempt at garnering political power. Certainly not I. Politicians will never fail to amaze me.

TRQ trades at $3.51, a 22% loss from our entry. We view Mongolia as a long term play, but TRQ has significant troubles ahead and we’re selling. A resolution on OT will, we believe will see FDI return and TRQ will benefit…but…

As a side note, the recent changes in Mongolian investment laws, specifically allowing foreign companies to buy Mongolian companies, has the potential to create a number of buyouts. These are contingent however on a far more favourable and stable political environment. The sheer potential of Mongolia means that from a risk/reward perspective we are happy to be involved. We’re none to happy with what has passed, though an investor’s job is to view things dispassionately.

Oct 4, 2013

Trade: Long GBP/CAD 

The GBP/CAD has broken out of a long-term bottoming phase and has now entered a primary bull trend. Given the length of time that the GBP/CAD has spent in its trading range (some 4 years), the upside should be very significant over the coming weeks and months.

GBP/CAD – two trades:

  1. Buy 10,000 20th Dec 2013 expiration 1.675 strike calls at 0.0224 (cost $224).
  2. Buy 10,000 2nd Oct 14 expiration 1.675 strike calls at 0.055 ($550).

How we did

The December expiring option closed at 0.17510, a 682% gain. The Oct 14 option trades at 0.1221, a 122% gain as of writing. This will be held to expiry. We expect time decay to push this gain substantially higher.

Oct 4, 2013

Trade: US Steel 

Given the cost of options on US Steel, the preferred way to take exposure is via long term options (LEAPS). My idea is to buy an even number of calls for Jan 2016 expiry, sell half when these calls double in value, and take the other half right through until expiry in January 2016.

Trade Details:

  1. Buy 2 Jan 2016, $25 strike calls on US Steel (X) @ $3.50 GTC.
  2. Place order to sell 1 Jan 2016, $25 strike call @ $7.00 GTC.

How we did

These calls trade today at 8.69 after having been bought at 3.50. As such, half of the position should have been sold for a double, and we’re holding the balance, sitting on a 148% gain with 2 years for this to make us a pile of money…or not. Remember, half the position should have been sold on a double so we’re playing with “house money”.

Oct 17, 2013

Trade: Long Petrobras 

Here is what we said:

The Brazilian petrochemical giant is now trading at the same level it was during the GFC in late 2008. It appears to be offering exceptional value as it is trading on a P/Book ratio of just 0.67x and has a current and forward P/E of approx 8x.

 At these valuations it is more or less priced for bankruptcy. However, with a debt to equity ratio of just 0.74x and a quick ratio of 1.7x this does not seem a likely outcome. A more likely outcome over the coming months is a surprise to the upside rather than downside. Time frame – 2 years.

  1. Buy 2 January 2016, $20 strike calls on PBR @ $1.70.
  2. Once executed place an order to sell one option @ $3.40.

How we did

The Jan 16, $20 calls trade today for 1.14 representing a loss of 33% with 2 full years for this to work out for us.

Oct 21, 2013

Trade: Short UNG or UGAZ or use options to do same with a 6 month time frame

No specific recommendations were made with respect to which options to buy, however at the time of this alert UNG was trading at $18.83 and UGAZ at $16.66.

Natural gas prices have spiked over the last couple of months resulting in losses for anyone who shorted over the last 3 months.

Today UNG trades at $20.49 and UGAZ at $20.74. This amounts to nearly a 10% loss and a 12% loss respectively.

Oct 22, 2013

Trade: US regional bank Regions Financial (NYSE:RF) 

The behaviour of Regions Financial is a good proxy for US regional banks in general. There is still significant “deep value” to be had in this sector, and Regions Financial, with a forward P/E less than 12x and a P/Book value of 0.95x, has a lot of upside potential with limited downside.

An “unwanted child” of the 2008 GFC, it is now breaking out of a 5-year trading range. When stocks breakout of long-term trading ranges the upside is usually significant.

  1. Buy 2 Jan 2016, $10 strike calls on RF @ the ask (current ask = $1.85).
  2. Place an order to sell one option @ $3.70 (2x the price paid for the option).
  3. Take the remaining option through until expiration in January of 2016.

How we did

The $10 strike trades at $1.90, representing a 3% gain with 2 years to expiration.

Oct 29, 2013

Trade: Long BP

This is what we said:

There is still significant “deep value” to be had in BP:

  • Forward P/E of 8x
  • P/Book value of 1.07x
  • Dividend Yield of 5x
  • Return on Equity of 21%,

With such low fundamental valuation metrics, all the fallout from the oil platform disaster a couple of years ago and a whole lot more appear to already be priced into BP’s stock. Accordingly, in my opinion there is a lot of upside in BP’s stock price and limited downside.

From a technical perspective note the trading range with which BP has been locked in for the last three years. Note how this trading range has been compressing over the last 12 months. This behaviour more often than not precedes substantial stock price movement.

  1. Buy 2 January 2016, $45 strike calls on BP @ the ask (current ask = $3.10)
  2. Place an order to sell one option @ $6.20 (2x the price paid for the option)
  3. Take the remaining option through until expiration in January of 2016

How we did

The Jan 16 $45 strike currently trades @ $5.50 representing a 77% gain.

Nov 12, 2013

Trade: Long NBG

Here is what we said:

Holding a bullish position on a Greek bank would have to be one of the more crazy trading ideas that you have ever come across. But often it’s the craziest ideas that turn out to be the best ideas.

I’m not going to get caught up in the fundamental outlook on NBG due to its complexity and considerable unknowns. What I will say is that NBG is in a long-term extremely oversold condition, and it is highly likely that all the negativity surrounding the economic crisis in Greece has already been factored into the stock price of NBG.

  1. Buy even amounts of January 2016, $7 & $10 strike calls on NBG @ the ask – current ask = $0.55 cents & $0.25 cents, respectively.
  2. Hold both options until expiration in January of 2016.

How we did

The $10 strike trades @ $0.25 so no change. The $7 strike is marginally higher at $0.52 or a 5% loss. This trade has a 2 year time frame to play out.

Nov 12, 2013

Trade: Suntrust banks (STI) 

SunTrust Banks is a very good proxy for the performance of the US Banking sector. As with most US banks it continues to trade below book value and remains out of favour with the investing public. Only now is it breaking out of its trading range that it has been locked in since the global financial crisis 5 years ago.

Why STI over other banks? There isn’t anything special about STI itself over and above other US banks. What is special is the availability of warrants which expire some 5 years from now in November 2018 with a strike of $44.15. Note the details below:

  1. Buy STI ‘B’ warrants, November 18 expiration, $44.15 strike, @ ask of $4.97.
  2. Hold warrants until expiration in November 2018.

How we did

The warrants trade @ 5.25 representing a 6% gain with nearly 5 years to expiry. The asymmetric potential of this trade is difficult to understate. It is LARGE.

Nov 25, 2013

Trade: Buy BAC calls 

Here is what we said:

Believe it or not Bank of America is still trading below book value some 5 years after the GFC. One would be inclined to think that after such time any write downs that were going to occur have already occurred. Given the cheap valuation of BAC it isn’t surprising to see sentiment towards the stock still extremely negative. An example of this sentiment is the removal of BAC from the Dow.

Instead of expressing a bullish view under a single time frame, let’s look at expressing a bullish view under multiple timeframes, i.e. call options for 3, 6, 12, & 24 months to expiration.

  1. February 2014 expiration, 2 x $16 strike @ $0.56*.
  2. August 2014 expiration, 1 x $16 strike @ $1.23*.
  3. January 2015 expiration, 1 x $17 strike @ $1.24*.
  4. January 2016 expiration, 1 x $17 strike @ $2.18*.

How we did

  • The Feb 14 $16 call trades for $0.88 representing a 57% gain.
  • The Aug 14 $16 call trades for $1.61 representing a 31% gain.
  • The Jan 15 $17 call trades for $1.62 representing a 31% loss.
  • The Feb 15 $17 call trades for $2.72 representing a 25% gain.

As of writing the spread of BAC calls represents an average 36% ROI with plenty of time till expiration on 3 of the 4 trades, and since the February trade is now “in the money” the value is likely to ramp higher as time to expiration draws near.

Nov 28, 2013

Trade: Long USD/JPY 

The USD/JPY is in a primary bull trend. It has worked off an overbought condition over the last 7 months, and is now in the process of reconfirming the uptrend.

I think the USD/JPY is in the process of “mean reverting” at least back to the level it was trading at just prior to the onset of the GFC in 2007 (120 level). This would be about a 20% rise from current levels, which is rather material.

  1. 12 individual trades of 10,000 USD/JPY 101.50 strike expiring at the end of December 2013 and for the next 11 months thereafter. All trades to be cash settled. This would come to a total of 120,000 options expiring in 12 different time frames over the next year.

How we did

This position is up 77% across the 12 positions ,while only Dec 13 has closed. We have a lot of time to profit provided the market continues to move as we expect.

Dec 4, 2013

Trade: Short EUR/GBP

Mean reversion is a very powerful concept that is little understood by investors. The essence of the EUR/GBP trade is to position for the EUR/GBP to revert back to its long term average which, prior to the GFC was 0.65 – 0.70. At current levels of 0.83 this represents a significant move.

Note the trading range that the EUR/GBP has been locked in since the end of 2008 (some 5 years ago). When breakouts of trading ranges occur they generally result in significant moves. I think that the next move for the EUR/GBP will be dramatic and to the downside.

Fundamental justification? The UK economy is doing materially better than the continental European economy. Accordingly, we are likely to find interest rates move higher in the UK before the Eurozone.

The reason for buying put options is because option implied volatility appears to be very cheap. Why out of the money puts? With volume being so low and the EUR/GBP having being locked in a trading range for the last 5 years, I think one should position for a big move to the downside over the coming 12 months, rather than a small move. Accordingly, I’m buying out of the money puts to get maximum gearing.

  1. Buy EUR/GPB Puts, $0.80 strike, 12 months expiration – current quote is 191 pips. For 10,000 puts this translates to approx 150 Euros.

How we did

The December 14 $0.80 strike puts are trading at 118 pips representing a 38% gain. Bear in mind this trade has 12 months to play out. It is early days and we may well see fireworks in this pair. Stay tuned.

Dec 9, 2013

Trade: Long Intel Corp

Intel has essentially gone nowhere for the last 10 years or so. However, during that time it has been quietly increasing its profitability and market dominance.

It is difficult to see Intel breaking to the downside over the coming months given that valuations are not excessive (PE 13x, P/Book 2.2x, Debt/Equity 26%, & ROE 18%). Rather I think it is just a question of time before Intel breaks to the upside. The key is that this time the stock is exceptionally cheap historically.

The aspect of Intel that is really appealing (over and above its cheap fundamental valuation) is the attractiveness of the options market. Options on Intel are extremely cheap. Note the graph below. It is an index of implied volatility on LEAPs (long term) options. You can see that implied volatility is more or less at record lows.

  1. Buy January 2016 calls on INTC $25 strike @ $2.60

How we did

This trade has only recently been placed and has 2 years till expiration. Right now the January 16 INTC $25 Strikes trade at $2.96, representing a 14% gain!

——–

The last 6 months of the year really focused on Brad’s trades. We think very highly of him, but we know that it’s not enough for us to just come out and tell you that we have ultimate faith in his abilities, and that he’s paid by Ultra High Net Worth individuals to trade their capital as well, you need to experience it for yourself.

Why do we work with Brad? Well, the average % return as of this writing for Brad’s options trades are 75%! That’s not a “per annum” figure, that’s the return to date since we started publishing Brad’s trades, which have been provided since the beginning of October completely gratis!

If readers had placed a total of $10,000 into the recommendations today they would have $17,500 less brokerage costs in just 3 months.

In the next post we’ll do some prognosticating on what 2014 may have in store…stay tuned!

– Chris

“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.” – Paul Tudor Jones

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