The JML fund was ripped from its summer slumber this afternoon–After effectively sidelining the fund for most of the summer, we’ve got a play we’re happy to call our own:
The complacency is palpable. Its our opinion that we’ve exceeded merely having a rift between steadily appreciating equity prices and smoothly evaporating volatility on the options side; we’re in the uncanny valley.
We have a simple solution for this: we’ve just bought 100 December contracts to call VXX US @ $12 for $1.70 (Total Cost $17,000 plus 40 bps commission). To compound our terror over the next few months, we’ve gone short 4 December S&P 500 E-Mini Futures at 1405 (We provided $20,000 to meet our initial margin requirements of $4,375 per contract–the position has a notional value of -$280,000).
We’ll go through our reasoning over the next few days as there are some other things on our minds (i.e. CPA rebalancing is requiring some harder decisions than originally anticipated)…
Have a feeling that we’re being a bit greedy by hanging on to our Netflix Puts through tomorrow. Have a feeling that we’re going to see mixed signals from Apple. I feel that we’re going to see them miss the iPhone whisper numbers of 33 million units and come in with something between 28 and 30 million. The iPad also only had 2 weeks of sale time during the last quarter which might also be a detriment. That said, we see the margins on the unrefreshed MacBooks being the highest ever–perhaps enough to be an equalizing factor all on its own–though we have doubts.
Anyway, we’re not too sure of what to make of the negative sentiment we’ve seen on Apple the last few days but by this afternoon we were down to $555ish before abating to the $560s. We think that there is going to be some serious swings regardless and are playing a straddle with May calls at 580 and May puts at 540. The possible run-on effects on tech from a poor showing are why we’re hanging on to Netflix through tomorrow morning. Most interesting and a bit worrying to us while we go into this trade is the implied options volatility of over 10% (~$57 cost on $560 straddle)–this is over 3 times more than the historic 3% move we’ve observed over the last 12 quarters.
Pretty excited with the after-hours action on Netflix this afternoon. Though top and bottom line came in better than the street expected, the company still managed to run a pre-adjustment loss of $0.08 per share on 21% higher year-on-year revenue. Even more notably, NFLX missed the high side of their guidance on subscriber growth (supposedly the main metric we should be looking at) and provided guidance of even lower growth next quarter with a projected addition of at most 800,000 new subs. Also, DVD subscribers are expected to decrease at an accelerating rate. Doesn’t exactly sound like a titillating buy.
Here’s a quick grab of where the JML stands just before open this morning. I’ve got a feeling that the timing is starting to be right on our volatility notes. Picking stocks in this environment is going to be far more challenging than it was the first quarter. We’re going to have to be far less lazy and do much more granular and insightful research.
As an aside, I highly recommend Philip Coggan’s Paper Promises; great, up to date primer that brings it all together with a fantastic pop-financelatticework of Taleb, Lewis, Shiller and Minsky quotes… Listen to the January 12 podcast from his speech at the LSE:
Yesterday I was shocked to see this news item. At first I was really skeptical as to whether this news was true but as I read more on it I could not believe my eyes. How the mighty have fallen. Couple this public relations faux pas with the fact that iPhone sales this last quarter finally overhauled sales of blackberry in Canada, Rim’s home market, an investor can clearly see the direction this company is going to and it’s definitely not up.
We have discussed Rim at length and at the beginning of the year I took down some of things we thought would happen. Our main prediction that they would get rid of their CEOs occurred but that in itself was massively ineffective in turning the company around and making them an attractive investment. Their new CEO is clearly just a figure head and the former heads are still very much in control and the fact that they have no idea that they missed the technological cycle on smartphones and tablets and are scrambling around trying to catch up smacks of people with too much money and little idea what to do with it.
HP did the smart thing and left the tablet market but why have Rim continued with their playbook when it’s clear they are losing a lot of money on the product. Just recently I read that they have added a keyboard attachment, which costs around 60% of the price of the playbook itself, why do this why throw money away for a product which I have to say is good hardware but will never ever have the appeal of an iPad. With the release of the new iPad recently they have fallen further behind in the technology cycle.
With all these negative things in mind, I have bought April puts of Rim at $13. The clear lack of realizing that they should cater to business and not consumers, their negative image in the consumer world and the fact that their lagging the technological cycle by quite some way are the reasons that I am very bearish on the stock and the company as a whole.