LEAPS
have been doing research on a different kind of investment strategy than I'm used to called Event Driven Investing. Essentially looking for companies that are about to/ In the middle of some event that is either going to make or break them. Example, huge law suits, major court decisions or say, an FDA approval for smaller biotech companies that are basically surviving on the approval of a single drug.
Basically situations that are either going send the stock flying or drive it down to zero.
Now the thing that makes this different is I'm looking at these companies options not the common stock,and more specifically their LEAPS( Long term Anticipation Securities). Essentially the options that expire In a year + as opposed to short term 1 or 3 month options.
It's a great way to leverage your upside potential while having a completly limited down side( the price you paid for the option).
Of course this is riskier than traditional investing but that's why I only plan on using a small percentage of my portfolio for the first few trades. Maybe start with a $1000 or so and see how it goes.
Has anybody done any sort of trades like this? How did they pan out for you?
Leaps aren't riskless. As far as options are concerened, the further out you go, the bigger the vega risk. They are also more illiquid since they are so far away from expiration.
Not to mention the fact that companies with publicly announced "huge law suits, major court decisions or FDA approvals" will have priced such risks into the vol, so you'll be paying exorbitant prices to buy the options. Also, how many LEAPS positions can you possibly afford with $1k? That's going to be a ridiculously concentrated portfolio.
I have used leaps successfully, I use leaps to replace my equity positions. Not sure w.r.t risk for event driven investing but for traditional equity investing where you do all your due diligence and decide to take a position, I use far out LEAPS. I do scale into positions though and its a PAIN! Lack of liquidity means waiting forever for fills or getting filled when its dropping. So a lot of baby sitting involved. I can however hedge better since weekly options are always cheaper, so when a position is not going my way, or there are earnings coming up and I am unsure its a cheap hedge.
I have been thinking about event driven a bit more and can remember the whole HLF debacle being the exact sort of event I would have liked to buy long term leaps for. Based on a few things, 1) being that lately stocks slammed by a HF manager tend to recover before a real event like earnings miss etc hit it, you can go back and take a look at what happens to the shorts einhorn announced each year at the IRA conf and say 2-4 week right after. This is actually even true for companies like GMCR which had real issues. 2) for anyone who's read Fooling Some of the People All of the Time, ackman's spiel was so much of a wanna be, I had high amount of confidence that it would be temporary 3) balance sheet strength, CF generating machines can fight out for a long time,
So sorry for the long spiel but I just wanted to highlight how its all about risk management and certain cases when its appropriate to buy leaps.
That's all great. But implied vol on HLF was probably off the charts post-Ackman announcement. It's not as though options traders are idiots or something. You are paying for that downside protection, especially with a stock like HLF that will essentially either double in value (if Ackman is wrong) or drop to zero (if Ackman is right).
I am saying I ignore IV and buy in the money calls way out. So if I buy ITM calls when it hit 30, I'm risking an additional downside of 15-20% in the underlying security(think it based ~25ish) w/o hedges. Risk was close to break even. If ackman was wrong I have substantial upside, if he is right I would exit with some loss, it was a good r:r, I actually looked at the math back when this happened, didn't take a position because I was too stretched. I used the exact strategy for one more stock with pretty good returns.
I agree, options traders are not stupid, all I'm saying is that the black scholes model has weakness's that can be exploited. Black scholes is reflective of past history not future afaik
If he was right you would exit with some loss? What? If he was right, you would lose everything.
This statement alone makes me think that you should steer clear of options trading. What does this even mean? "Black Scholes" has weaknesses that can be exploited?
I mean if he were right, I would have time to exit that position with some loss, remember these things play out over a period of months(this is where balance sheet comes into play, stronger the companies balance sheet the more they can fight back, hlf did a buy back for instance reducing the float and remember this is a
All this really boils down to is that you believe you know more than the market, and you're using options to make leveraged directional bets. Which - I mean - that's great for you, I guess. Not easily replicated by those of us without the same crystal ball.
But that is exactly what trading/investing is about, you use analytical skills to come up with a risk-to-reward strategy and bet on it. Your tolerance for risk, drawdown and risk management dictate sizing and positioning. I have nailed this particular strategy but there are plenty of times when I miss stuff and need to re-cal (like es futures right now killing me :' (. The point I'm trying to make is that it's hard and takes ton of effort but depending on level of interest and seriousness can be analyzed
And yes I do think efficient market theory is a half truth like Schiller says :) and I'll stop now.
Suffice to say, I don't think the HLF situation was nearly as simple as you're making it out to be. Even in the absence of options trading, you would be up 60% on a straight equity investment if you had as much conviction as you appear to. Maybe you are, but I am skeptical of anyone whose strategy is "I read the news better than you". If it, indeed, "didn't take a rocket scientist to tell that Ackman was screwed", then a boat load of l/s funds lost out on 60% returns over a 6 month period.
What are you talking about?
What he is saying makes absolutely no sense, don't worry.
Buy LEAPS on Energy (Originally Posted: 03/15/2011)
After reading some of alexpasch's ideas I became intrigued by the energy sector. In addition nuclear energy; the only economically feasible form of alternative energy for the foreseeable future is unlikely to make any headway in the next few decades. I firmly believe that recent events in Japan have created a social and political environment that make developing nuclear power plants very difficult. Yet, despite all this conventional energy stocks have taken a hell of a beating in the last week. Peak oil is coming, I'm not just bullish on energy, I'm tempted to put 25% of my portfolio into LEAPS. What do you monkeys think?
What do you guys think of esolar ? if they can bring down the price point by as much as they assume they can, then I think it may very well be the next big thing.
http://www.esolar.com/our_solution/
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2664
[quote=monyet]What do you guys think of esolar ? if they can bring down the price point by as much as they assume they can, then I think it may very well be the next big thing.
http://www.esolar.com/our_solution/
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2664[/quote]
Do your due diligence on this tech - check ($/kw to build, NCF, O&M), they will have higher operating costs than PV, but if you fancy Solar Towers, check BrightSource, & Solar Reserve. The modular design is good, but for less than 50MW, you would go PV. No Steam turbine, lower EPC, quicker construction time, easier to structure, etc
The deals in PPA's and RFP's signed CA and AZ are usually
Everyone claims to have the next big thing. Until, I see proof, that the next big thing in alternative energy is an economically feasible option, I'm long oil.
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