I had an interesting conversation with Brad covering the global macro situation which I decided to record. I’ve excerpted a slice of it below which I felt was pertinent to the types of trades that Brad hunts for, and then we answer a couple of this week’s questions.
If you have any questions, thoughts or comments for us feel free to drop them here. Brad’s specialty is trading the equities markets. He looks at the global macro for his ideas first and foremost, looking for deep value asymmetric payoffs, normally via options.
Chris: Hey Brad, I know you’ve been busy with your trading. Tell me, what are you looking at right now?
Brad: Well Chris, we can buy options on a country index (symbol redacted for subscribers benefit) right now that looks really cheap. These options are an at the money call option costing us 12% of premium. This is a December 2017 expiry, meaning we have 4 years for this to go up just 12% for us to break even!
Now you might be thinking, “Oh, well it’s priced like that because it’s stupidly overvalued and investors are no longer willing to pay for any upward movement within the next 4 years, but you’d be wrong.
Let’s look at the valuation of this index. It is 1.16 book value, so only 16% above book value. The S&P in contrast is about 2.63 times. Price to sales ratio is just 0.6X. In contrast price to sales of the S&P is 1.69 so the S&P is over 200% more expensive in terms of price to book and over 280% more expensive in terms of price to sales.
Chris: Deep value… Sounds like the Brad I know.
Brad: Not only deep value, but also a deeply liquid market.
Chris: What else is on the radar?
Brad: Right, so I’m looking at a large global company where the December 2018 calls are trading for only a 7% premium.
Chris: Wow! So we’re looking at 5 full years to expiry and our risk to break-even is for these calls to rise by just 7%? Nice. What does the valuation look like?
Brad: Price to earnings of 10, and a price to book of 1.3.
Look Chris, these are things you just buy and put them in your back pocket and leave them. They don’t come around every day but as you know I’ve made a living by ferreting them out and jumping on them when the time is right. I forgot to tell you the dividend yield on this is 4.8%.
So you could get aggressive and just buy the call options, and the only question is how much do you want to buy? Or, you could be conservative and for example put say $10,000 into the actual stock, collect your 5% dividend yield, then take roughly $2,000 and buy 5 call options at the money. You would now have roughly $17,000 of exposure to the company, of which you’re getting a 5% yield on $10k. After 2 years you’ve paid for those call options. Now, those options are delta 0.5 so as the price rises your delta kicks in and things get very, very profitable.
Chris: Thanks Brad!
We had a couple of questions this week, many on the same theme.
Dear Brad. Thank you for the excellent publication. I have interest in a managed account. Would you be kind enough to send details on how this would work? I’d like to see:
- Track record and history
- Fees and charges
- Minimum amount to start
- Would this type of trade be best in an IRA or regular account
- What house or source are funds traded thru and in whose name
- Any other data that might be helpful
Your time is appreciated.
Managed accounts are not something I take lightly. On an individual basis, from time to time I will manage an account for a client, however the minimum account size required is not accessible for most. However, I am setting up a vehicle, a fund, that should be available shortly for high net worth individuals. The fund will require a minimum deposit of $50,000. If this is of interest then let me know, or alternatively if you are interested in a managed account I’ll be glad to share track record and so forth.
How can I find out more about your trading for private individuals. Can you send me information and what are the requirements? Also, can you send me information on your track record? Thank you.
Being busy people ourselves, we know how great it can be when we can automate something that we don’t have time for. With that in mind, we figured we’d solve a problem we’ve had personally – How to place Brad’s trades in an automated fashion.
It took us a while, but we finally found a broker who has agreed to auto-trade subscriber’s accounts for the Capex Asymmetric Trader.
What this means is that as a valued subscriber you will be able to open an account directly with this broker (we are not brokers, this service is provided by a licensed/regulated options brokerage), and once we verify that you are an active subscriber they will trade your account as per the following (in their own words):
“Once verified, we will activate the customer under your service to begin auto trading. Customers have the ability to set their auto trade allocation amount to a specific dollar amount, a percentage of account value, or a set number of contracts per alert.
When we receive an alert, we input the parameters into our proprietary auto trade system. Our system is constantly scanning balances and positions so that when an alert comes in, we can quickly determine who should participate and at what level. We will then enter one order to the market for all active auto traders. Once filled, we’ll allocate the options to each account at the executed average price. We do it this way to keep it fair and equitable for all participants. It also allows us to move quickly to execute the order. The order entry process literally takes just seconds to execute.”
If this service is of interest to you go ahead and SIGN UP for the Capex Assymetric Trader and try it out.
Have a wonderful weekend!
– Chris, Brad, and the rest of the team