Value Options: AMZN & UBER – Two Short-Term Option Income Ideas

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed:

• Why Amazon’s Massive AI Spending Could Be Creating a Buying Opportunity
• This Amazon Options Trade Targets a 30% Annualized Return
• The Biggest Mistake Investors Make When Selling Put Options
• Could Uber Be a Long-Term Winner in the Robotaxi Revolution?
• How This Uber Options Trade Creates a Cheaper Entry Price

TRANSCRIPT

[Tobias] Hi, I’m Tobias Carlisle. This is the Value Options Podcast. I’m here with my co-host, Tim Travis.

How are you, Tim?

[Tim] I’m doing well, Toby. How are you?

[Tobias] I’m very well. Let’s talk, as we always do first, let’s just describe what value options are.

[Tim] Right. So value options are, we’re first identifying undervalued stocks that are trading at large discounts to our estimates of intrinsic value. And then what we’re doing is utilising conservative income generating strategies such as cash secured puts and covered calls to generate income, reduce risk, and to instil an element of timing into the investment.

So that’s kind of our definition of value options.

[Tobias] Yes. So to be very clear, we talk about making sure that you want to own the underlying because the risk profile of, we’re typically option sellers, the risk profile of an option seller is equity downside with a capped upside. And then that capped upside, because you have to put the cash into the account, it’s cash secured.

You want to make sure you’re getting sufficient return in the premium relative to the cash secured. And so we do an internal rate of return calculation. And so those two criteria have to be satisfied before you want to put a position on.

Why Amazon’s Massive AI Spending Could Be Creating a Buying Opportunity

[Tobias] So let’s talk a little bit about some trades that we’ve got going on right now. Amazon, what’s the value proposition in Amazon?

[Tim] If you look at the multiple of Amazon, it’s really kind of a mid to almost low 20s, depending on your earnings estimates, multiple unadjusted earnings. They’re investing heavily. So the free cashflow metrics are not great.

The margins have actually been improving because Amazon Web Services and advertising have become much larger components of the overall business. And they’re investing so much money into the chips and to the computing power that it’s reduced the cashflow. But we think that the return on investment is going to be quite high.

So what I think it’s doing, Toby, is it’s creating short-term opportunities where the market focusses on how much they’re spending and the stock sells off a little bit. It kind of gives us an opportunity to reload the gun a bit, sell puts on the stock and either generate an attractive premium or manufacture that cheaper entry price into the stock.

This Amazon Options Trade Targets a 30% Annualized Return

[Tobias] So let’s talk a little bit about the option trade that we’ve got on for Amazon.

[Tim] Yeah. So today we sold it. We sold the put.

So we sold a trade today that expires on August 5th. So this is like 14 days out. And we sold a $225 put for $2.60 of premium. And so I think the stock’s trading at around $245, something like that. Last I looked, maybe right around there. And so we’ve manufactured a nice little bit of a margin of safety.

So mid $240s, all the way down to $225. We’ve collected $2.60, which doesn’t seem like a huge amount. It’s 1.17% on the capital required, but this is 14 days. So the annualised returns 30.5%. And we are more than happy to own the stock at that level. If we do get exercise, Toby, we’ll have a plethora of options, whether that’s just holding the stock or inciting the wheel and doing a covered call. And at that price, we could sell calls at relatively low levels and get really good premiums.

So either way, we’re comfortable with it.

[Tobias] Yeah. So the stock is pretty good value here. If the stock drops further to the strike, we’ve still got a little bit of premium built in, a little bit of margin of safety, but combined together with the strike and the premium, it’s a pretty significant margin of safety relative to where the stock is trading now, which is still a pretty good price.

And on the other side, small absolute return, but in an internal rate of return calculation, because it’s such a small amount of time to expiry, 14 days, a little bit more than two weeks in trading terms, pretty good return, 30% ish. So that’s a pretty typical trade that gets put on through the website.

[Tim] Yeah. The value options letter, that’s one of the things that we do put a focus on is having a variety of different expirations, some short term, some longer term, also a variety of different industries. We don’t expect subscribers to pick every trade.

I mean, it’s up to them. It’s smart to keep a reasonable level of diversification. And if you like the idea, feel free to act on it.

But I like this type of investment because you might be thinking, there’s a lot of people out there like, well, Amazon’s had a decent run. I would like to buy in the mid 220s. If it gets there, I want to keep a little cash in reserve.

The Biggest Mistake Investors Make When Selling Put Options

But what’s cool about this strategy is that you’re getting 1.2%, basically, in 14 days. And your worst case scenario is you’re buying a stock you want to own at a more compelling valuation. Now, in that window, we’re going to have earnings come out.

And so that’s why you get a little higher volatility than you normally would get. So right now, this is kind of a fun time for option sellers. Now, of course, they could bomb earnings, they could bomb their guidance, and the stock could easily fall below 225.

So you only want to do something like this if you’re willing to own the stock. It’s not, oh, gosh, we’re getting exercised, we lost. It’s not that whatsoever.

That’s a key principle of the value options letter, which is different than the way 99% of people use options.

Could Uber Be a Long-Term Winner in the Robotaxi Revolution?

[Tobias] Yeah, great. Let’s talk a little bit about another trade that we’ve got on Uber. One of the interesting things about Uber, flipped cash flow positive a few years ago.

Its main competitor, Lyft, has now also flipped cash flow positive, which suggests that industry is doing fairly well, pretty healthy. And Uber, I think, probably out-competes Lyft over the long term because this is a network effects type business where more drivers, more customers means more density, shorter wait times, greater selection of vehicles. I guess the risk is that some of these self-driving businesses like Tesla has the cyber cab and Waymo perhaps are competing directly with these guys.

But I see them probably ultimately as beneficiaries of the self-driving as well, because to me, the harder thing to build out is the network rather than the underlying self-driving car. I think that technology is probably more likely to be commoditised than the network is the really difficult thing to build out. But let’s talk, tell me what’s your thesis for Uber.

How This Uber Options Trade Creates a Cheaper Entry Price

[Tim] It’s got some similarities to Amazon in that the margins are increasing quite substantially. The free cash flows are quite high and growing. It’s still growing at a rapid rate.

But the multiples come down a lot. And so it’s the cheapest it’s been on a price to free cash flow basis in quite some time. Once again, Toby, it’s that situation where earnings are coming out relatively soon.

So you have the perception of volatility in the stock. And so the premiums are pretty high. So once again, this is kind of a shorter term trade.

August 21st is the expiration. And the trade we did today, so this is 30 days out, is we sold a $62 put and we collected $75 of premium. So 75 cents a share.

And on this trade, once again, you’re targeting about 1.22% on capital, but it’s 14.9% annualised. And your worst case scenario is you’re going to own Uber, which I believe is trading at around 73-ish when we looked at this, but you’re going to own it at below 62. So you have a very large margin of safety.

So if you like the stock, this is a great way to manufacture a cheaper entry price into it. And worst case scenario, you’re getting a 15% annualised return and it’s a fairly short-term trade. So it’s another one we like on a high quality business.

[Tobias] Yeah. Great idea. So folks, if you’re interested in learning more about the strategy, you can go to the website, valueoptionsletter.com forward slash subscribe. There’s a seven-day free trial. So you’ll see trades come through during that period of time, make up your mind whether it’s right for you or not. And then we have a deal going on for another week where it’s half price relative to the long run pricing and you’ll be grandfathered and you’ll keep that price forever.

But that goes away on July 30. Any further words Tim?

[Tim] No, that’s great. I’m glad you mentioned that. So take advantage of it.

We want you to get the best deal possible. The price is going to double and that’s going to be a permanent thing. And what’s great is if you get in, in the next nine days, eight days, you’re going to get that $99 a month or $999 a year forever.

So I think it’s a great value. I mean, as you can see, both these trades are basically paying for itself in a month, much more so if you do both of them. So we think it’s a good value.

So no, thanks. And I’m looking forward to again next week.

[Tobias] Thanks folks. We’ll see you then.