Why Value Investors Sell Options When a Stock Has Clouds

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed Get Paid While You Wait. Here’s an excerpt from the episode:

[Tobias] It’s worth pointing out that the time to enter into these positions is usually when there’s some overriding concern about the business. These opportunities are only presented when the positions are, there’s some perception that there’s something, the matter with the stock.

[Tim] There’s clouds, there’s clouds, right? Yeah, you gotta have clouds.

[Tobias] A good example of that was last year when energy around this time, maybe a little bit later, WTI oil was trading at $60, 60 handle. And all of the pundits were saying it’s going lower from here. And oil equities traded down very cheaply.

And the future is unclear at that point, but historically there’s been some event that’s come along with energy equities and bumped them along. And sure enough, that happened with the conflict in Iran. I just think it’s a good example of just ignoring the headlines, looking at the fundamentals of the stock, looking at the, and the headlines can be great for an option service when they inject some volatility, which then increases the yield that you can pull out of these options.

How does that sound?

[Tim] Oh, you’re right. I mean, it was prior to the website being launched, but I remember last year buying a lot of MLPs that had 8% dividend yields. And it’s like you were alluding to, there was excess supply of natural gas and crude oil.

And then OPEC was going to increase their quotas. It was a lot of negative elements on the overall price. And like you said, the stocks got pretty cheap and they’ve gone on a huge run, the MLPs included.

We’ve had a number of energy trades on the site that have been successful. And we’re constantly looking for opportunities. Obviously a little pullback would be ideal for something like that.

But that’s, your point is exactly right. Like you and I as value guys, we could both look at like a stock like Avicii and we might have slightly different numbers, but I think we would both probably agree that the stock’s undervalued at the current price. You know, is 10 times cash flows the right price, 7% dividend yield for a company of that quality?

Probably not. But the timing is the issue, right? So it’s like, well, what if rates go to 4.15 on the 10-year?

You know, that could cause the stock to dip to 23. And, you know, if you have a long-term time horizon, truthfully, you still buy it, right? You’re still buying it even though you can’t predict that short-term.