Value Options: On DVN, NFLX, NOW, ORCL, RBLX? The Results Are In.

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

• When Should You Close a Cash-Secured Put Early?
• Why We Sell Puts Only on Stocks We’d Own
• How We Made Money on Netflix Using Options
• How To Create a 27% Margin of Safety Using Options
• Why Selling Puts Can Be More Flexible Than Buying the Stock

TRANSCRIPT

[Tobias] Hi, I’m Tobias Carlisle. Welcome to the Value Options Letter podcast. I’m joined, as always, by my co-host, Tim Travis.

How are you, Tim?

[Tim] I’m good, Toby. How are you?

[Tobias] Well, big news. The Fed has hiked interest rates 25 basis points. We’re going to talk about the impact of that.

Plus, we’ve got some closed trades to discuss. But first, the Fed hike, what did you think of that? Did you expect that?

The market seemed to expect that.

[Tim] I’m glad they did it. I mean, if they wouldn’t have done that, the long end of the yield curve likely would have seen rates keep crawling up quite a bit. And that, I think, is the ultimate pain spot.

So I think it shows a little bit of credibility with the Fed. And now, I mean, all the pressures on really the president to end this war. I mean, everyone can see how damaging it is.

And the Houthis just took that pipeline with Saudi Arabia battling them. And that’s another huge issue that’s pressuring oil prices. So we’ve got the election coming up, and that seems to be the most important issue.

So I think the Fed did the right thing.

[Tobias] Yeah, I tend to see it the same way. I track the two-year as a proxy for what the Fed does. And the two-year has been trading well north of the Fed funds rate.

Inflation has been quite sticky too. I think it came in at 3.4%. They say their target’s 2%. They haven’t been anywhere near that for more than five or six years now.

And even 2% is a little bit too high for my taste. I think all of that is biting the consumer. And then you throw in energy prices as well.

Thank God I’ve got an EV, but I also have to fill up the Toyota every now and again. It’s a little bit of sticker shock every time you put a full tank of gas, particularly in California.

[Tim] Oh, in California. I can’t even imagine. In Arizona, I mean, it’s really bad.

I think for super premium, it was like six bucks a gallon last time I did it. It’s awful.

[Tobias] California prices.

[Tim] Yeah. Yeah. No kidding.

[Tobias] Exactly. And diesel as well. I saw they ran out of figures.

They’ve only got $9.99. They can’t go any higher than that until they add on an extra. Yeah. That’s a real problem.

But those two things combined with student loan repayments have restarted. So there’s been some pain, particularly in restaurant stocks and discretionary. They’ve really suffered.

I think there’s quite a few bargains in that group. And so I’ve been looking through them, turning over some rocks in there, and I think there’s a lot of interesting stuff in there. But let’s talk about some of the closed trades that we’ve put through over the last week.

[Tim] Right, Toby. So as we’ve discussed before, our goal is to put out about three to five trades a week. And sometimes we do more than that.

Sometimes we do a little bit less. But today’s a good day. We closed out five trades, locking in most of the profits.

These all expired in January, but we closed them out. Here we are mid-September. And so let’s look at the economics of it.

Okay, Toby. So here we go. Let’s talk about the trades that we closed out on September 16th here.

When Should You Close a Cash-Secured Put Early?

So it’s important to know when to get into a trade, but also when to leave. So there’s a variety of reasons. One reason to exit is maybe you’re wrong on your trade.

Maybe the thesis changed, and you want to limit your losses. That’s one valid reason. Another valid reason is you’ve made most of the profit.

The capital that’s tied up in the trade is too much relative to the remaining profit. And so for capital efficiency purposes, it makes sense to close it out, free up that capital that allows you to set new trades. And so that’s kind of what we saw on these ones.

Why We Sell Puts Only on Stocks We’d Own

So as part of our process, we sold puts on businesses that we want to own. That’s a key criteria. So each strike sat 11% to 38% below where the stock traded that day.

So relatively conservative trades here, Toby. I mean, a bear market’s defined by a 20% downturn. We’re building in quite a cushion, and we collect that premium up front.

And it’s the most the trade can ever make, assuming the option expires worthless. So our target profit is always the full premium. Ideally, the stocks go up when we sell puts on them, but even if they stay flat or if we end up getting exercise, that’s okay.

And then the reason we’re exiting is because we made most of the money. And so the annualised return was way higher than what we targeted. And so it made sense to free up the capital.

So the first one was Devon Energy. So on July 10, the stock was at $42.23. We sold a $37.50 put for January, and we collected $2.24 a share. And the target profit was 6.35% on the capital, and that’s 12.3% annualised on over 189 days. So 12.3% annualised is good. I mean, it’s over our double-digit hurdle that we target generally, but you can see what happened. So energy prices went up, the stock of Devon rallied.

And so we were able to exit with $190 of that $224 profit for a 29% annualised return. And we’re freeing up that capital that was required, and we can set a new trade. So that’s an example in the energy sector.

How We Made Money On Netflix Using Options

Netflix. So Netflix has given kind of two big windows to get involved on the option side of things. The first one, if you remember, Toby, was when they made that bid for Warner Brothers.

And the market hated that deal because there’s so much debt in it. And I mean, it just introduced kind of a lot of risks to Netflix. And so that gave a window where the stock sold off pretty hard.

And in other businesses that I’m in, we definitely took advantage of that. The value options letter wasn’t set up yet, but we had another recent window about a couple months back now where the stock sold off a little bit again. And so when the stock was at 66.78, we played it very conservatively on July 17th, we sold a $58 put for $3.25 a share. So we were targeting just under 6% on our capital. You know, this is about a half year long trade. And so that’s just under 12% annualised.

But once again, what ended up happening is we held the trade for about two months, and we were able to get out the vast majority of the profit, $273 of 325. So we exited with 29.8% annualised, and we freed up that capital. So we earned 5% in just 61 of the 182 days that we were targeting.

[Tobias] So great work.

[Tim] I like the diversification you can do with this, Toby. I mean, lots of different sectors, whatever’s in favour, out of favour, the volatility and the valuations are what’s important.

[Tobias] Yeah, oil and gas, tech stuff.

[Tim] Yeah, sure. Yeah. So the third trade, this is a trade we talked about a lot.

How To Create a 27% Margin of Safety Using Options

And I think the value options letter came at a good time, because that’s really when the SAAS apocalypse was at its full force. And so service now on July 23rd, the stock was at 185. And so what we did was we sold a $74 put 27% below where the stock was trading at, and we collected $4 a share.

So our target profit was 5.7% on capital. Once again, just under 12%. These trades are pretty similar in how they were constructed.

The stock rallied to about 138. And we were able to close out the trade after just holding it for 55 days. And we made $346 of the $400 target profit.

Why Selling Puts Can Be More Flexible Than Buying the Stock

So a 5% return on your money in a short amount of time, just under less than two months. So that’s a 32.8% annualised trade. And here’s the thing, some people will be like, well, shoot, I should have just owned the stock.

And absolutely, at the right price, most stocks can be good buys at the right price. And there has been times where service now has been a clear and present buy. But one cool thing about the options is that often you get a lot of reloads on it.

So I have positions that I’ve sold puts on for no joke, 17 years, over and over again, over and over again selling puts. And on the one stock that I’m thinking of, and you probably know that company too- A short guarantee. Yeah, yeah, yeah.

It’s never been a mistake to have sold a put with any long-term time horizon. Because even if you’ve been exercised, it’s rallied, and then you’ve had the tailwind of stock buyback. So yeah, so that’s one of the cool things.

It’s very possible we’ll get other shots at it.

[Tobias] It’s a good argument for a service like this, which monitors the positions after they’re established so that you can see, even though the annualised return from inception was a little bit over, almost 6%, 5.7%. If you pay attention and you get that rally, and you can take the position off in a shorter period of time, that improves the internal rate of return, which compounded over a number of positions over an extended period of time, produces some pretty good results.

[Tim] And remember, when we sold … So to generate a 33% annualised return, we sold a put on a stock that’s already gotten crushed at a 27% discount to where it was at. So you’re building a very significant margin of safety relative to what you’re doing in the market.

So it’s really not an apples for oranges thing. It’s a very different risk profile too. So I like that.

Fourth trade, Oracle, similar story though. On July 29th, Oracle was trading at 121.18. Once again, this sucker got crushed. So Oracle’s got phenomenal revenue growth from the databases that they’re building and the relationships that they’re building with OpenAI and Anthropic.

But the problem is cashflow. So it’s sapped up a lot of their, almost all their free cashflow. And they’re even dipping into having to issue quite a bit of debt.

And so the stock’s gotten crushed, but the underlying business is pretty damn healthy in my opinion. And so the stock was trading at 121.18. We played it, once again, very conservatively. We sold a $75 put 38% below where the shares were at.

We collected $4.25 per share. And our target was 6% on capital, annualised 13%. So you might, if you’re a subscriber, you might look at these trades when they’re set and be like, oh, you know, 30%, that’s cool.

But it’s not, you know, it’s not super sexy, but here we are. And 49 days later, we’ve been able to exit the trade with a $378 profit, 5.3% on the money. And that’s just under 40% annualised.

So once again, this is a trade way out of the money. And, you know, we didn’t have to take ownership, but we would have been willing to. And we’re able to close that one out.

Good stuff. And then the last one, Toby. So this was just, this was one that kind of just popped up.

Roblox, I believe it was after their earnings. So Roblox is a stock I’ve followed for a long time since the IPO. I mean, I have kids that are 13 and seven, two girls.

And you know, Toby, I mean, they’re obsessed with this. Like they play it all the time. Often parents will play it with them.

I don’t do that myself, but other parents do and nothing wrong with it. I would if I had a little extra time, but so the stock sold off to about $35.59. And I think there’s a lot of levers Roblox can play to kind of improve profitability at some point. I don’t think, I think they’re, you know, kind of focused on some of the right things.

They’re changing, they’re making a safer product and stuff like that. So there’s been some short-term headwinds, but what we did was once again, we played it very conservative. We sold a $22.50 put, and we collected $1.05. So our target profit was 4.9% on capital and 11.5% annualised. Roblox rallied, not a tonne of like news occurred. It’s just kind of, you know, people realised the stock had gotten a little bit of cheap, way too cheap. It rallied.

And on today it was trading at $50.16. And so, you know, on the value options letter, we issued the order to close it out at 22 cents a share. So it’s an $83 profit. It’s not a lot.

It’s 3.9% on the money that was required for it. You don’t have to do just one strike of these. I mean, the subscriber makes the decision on how many contracts they want to do on these, but a 41.5% annualised return on the trade. So those are the five that we closed out today. And it’s cool that we’re able to give these, you know, the same day that we’re doing this podcast, that we closed them out.

[Tobias] So folks, that’s the review of some recently closed trades. If you want to see what we’re doing at value options letter, you can start a free trial, seven days. Just go to value options letter slash subscribe and check it out.

Anything to add Tim? Yeah, no, that’s great. We’ll be back again next week.

Appreciate your time folks. See you then.