Dollar Cost Average Using OptionsThe Acquirer's Multiple
During his recent interview on The Acquirers Podcast with Tobias, Tim Travis, founder and deep value investor at T&T Capital Management discussed Dollar Cost Average Using Options. Here’s an excerpt from the interview:
Dollar Cost Average Using Options
Tobias: We were speaking a little bit before about rebalancing, so you definitely buy as something’s going against you a little bit to take advantage of those lower prices. But when you think about constructing the portfolio, how do you think about sizing positions?
Tim: Yeah, we’re always going to allocate the most to our best ideas. There’s not a 5% rule where you’re going to have 20 positions at 5% or anything like that. We’ll definitely do the biggest positions on our best ideas. Then, we’ll build into other positions with options. It’s like, “Okay, well, if Cleveland-Cliffs goes lower, it might go from a 2% position to a 5% position with getting exercise on options, but that’s at our price.” So, it’s just basically a synthetic way of dollar cost averaging on the share. It’s structured like that.
Tobias: How do you think about sizing the options positions? You’re always thinking as the nominal position is capped at some 2% or 5% holding?
Tim: I’d say we’re fairly agnostic. I don’t really care for using options in the way that we use them. Keep in mind, we’re not buying options, not that there’s anything wrong with that, but I think that the odds are more in your favor with selling options. So, we’re pretty agnostic. We just want the best risk-adjusted return. But in this market environment, I’m not optimistic on the next three to five years on equities at all. I’m very bearish, I’d say.
Not John Hussman bearish, but I’m bearish. Normally, I’m very optimistic. What I want to do is, I want to take, okay, I’ve got a few bets, that I think the odds are stacked in my favor, where there’s a lot of upside. You could get a double on an AGO easily, or 50% in a year. That’s very possible from current levels. It would still be undervalued. But then, with the rest of the market–
Look, if you tell me, I could get 7% a year over the next three years, I would probably be comfortable with that. I’d be comfortable with where the valuations are. One thing I was thinking before, our call was, I was looking at 2000, because it’s a great analogy for the president. The 10-year Treasury was about 6.5%. Imagine that. You are a money manager too. Imagine 6.5% with no credit risk versus, where we’re at with multiples here. It’s an interesting conversation to have.
Tobias: That 6.5%, that’s a nice hedge too, because if you get some market volatility, it’s likely that there’s a flight to that. So, you get some rally in your holdings.
Tim: Exactly, exactly. It’s a huge hedge. Yeah, it’s stunning to think about that. That’s why this is the everything bubble, real estate, it is hard to find asset classes that aren’t in in a bubble right now
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