I don't normally make personal New Year's Resolutions, but in my capacity as a business leader I can apply some to my company.
This is turning out to be another not-so-great month for the Alpha-D's special situations options plays. Today I closed out my short calls on WB (now WFC), MER (now BAC), AW (now RSG), and APPX (now contingent rights APCVZ, plus ABII). The plays on the two financial stocks made me some money, but the garbage hauler and the drug maker cost me quite a bit. The risk premia on the latter two were actually increasing rather than declining as their expiration dates approached. I would have been left with the unfavorable option of converting the holdings to a buy-write strategy by going long the underlying stock. My problem with that is that I simply don't know the waste management or pharmaceutical industries well enough to publish covered research on their stocks, so I decided to close out the options at losses rather than take on more enterprise risk.
So should I give up M&A action? Heck no! There's too much easy money on that table for me to walk away. I've learned my lessons:
1. I will only write uncovered calls on M+A targets that are purchased in all-cash offers. I really bought myself some trouble when the APPX options transformed into contingent rights that were hard for me to value in terms of cash flow, book value, or anything else.
2. I will consider going long the target stock in all cash offers. I missed out on some money to be made on other plays I executed well in 2008 (Budweiser) by not buying the target firm.
3. I will consider going short the acquirer in both cash and stock deals. This is one way I could have made some money on the two losing plays above. Shorting acquirers (or selling uncovered calls) is a way to participate in merger arbitrage without exposing myself to the converted options of the target firms in all-stock or cash-stock deals. Of course, taking a position in the acquirer brings its own risk that the acquirer's share price could increase. "There are no solutions, only changed problems." My old MBA professor's wisdom is never far away.
I therefore resolve to be more diligent with Alfidi Capital's special situation investing for 2009. You can read my elaboration of all of my lessons learned in my upcoming annual report for 2008. You'll be able to find it on the Alfidi Capital main site by the end of January.
This is turning out to be another not-so-great month for the Alpha-D's special situations options plays. Today I closed out my short calls on WB (now WFC), MER (now BAC), AW (now RSG), and APPX (now contingent rights APCVZ, plus ABII). The plays on the two financial stocks made me some money, but the garbage hauler and the drug maker cost me quite a bit. The risk premia on the latter two were actually increasing rather than declining as their expiration dates approached. I would have been left with the unfavorable option of converting the holdings to a buy-write strategy by going long the underlying stock. My problem with that is that I simply don't know the waste management or pharmaceutical industries well enough to publish covered research on their stocks, so I decided to close out the options at losses rather than take on more enterprise risk.
So should I give up M&A action? Heck no! There's too much easy money on that table for me to walk away. I've learned my lessons:
1. I will only write uncovered calls on M+A targets that are purchased in all-cash offers. I really bought myself some trouble when the APPX options transformed into contingent rights that were hard for me to value in terms of cash flow, book value, or anything else.
2. I will consider going long the target stock in all cash offers. I missed out on some money to be made on other plays I executed well in 2008 (Budweiser) by not buying the target firm.
3. I will consider going short the acquirer in both cash and stock deals. This is one way I could have made some money on the two losing plays above. Shorting acquirers (or selling uncovered calls) is a way to participate in merger arbitrage without exposing myself to the converted options of the target firms in all-stock or cash-stock deals. Of course, taking a position in the acquirer brings its own risk that the acquirer's share price could increase. "There are no solutions, only changed problems." My old MBA professor's wisdom is never far away.
I therefore resolve to be more diligent with Alfidi Capital's special situation investing for 2009. You can read my elaboration of all of my lessons learned in my upcoming annual report for 2008. You'll be able to find it on the Alfidi Capital main site by the end of January.
