Deep discount buys using options


vvskyscraperAccumulation of first class assets at a safety discount

is one of the safest ways to build a size­ab­le nest egg. The value part of GAMAG´s Vola+Value-startegy is old fashio­ned deep value inves­ting. The inno­va­ti­on is the com­bi­na­ti­on of this pro­ven approach which among others made War­ren Buf­fett one of the richest per­sons on this pla­net and amde his men­tor Ben­ja­min Gra­ham the god­fa­ther of inves­ting with short opti­ons posi­ti­ons. Often after a deep fall stocks need some time to rest­ruc­tu­re until a new wealth cicle emer­ges. Opti­ons enab­le an inves­tor to buy at a fur­ther dis­count while achie­ving addi­tio­nal gains from option´s pre­mia as he or she is wai­ting out the bot­tom bui­ding pro­cess. Assuming a real esta­te company´s stock fell from 200 to 100 whe­re­as the real esta­te is worth 150/stock the deep value level is the­re. Clas­sic deep value inves­ting would now sta­te that a suf­fi­ci­ent dis­count to net asset value has been reached and buy the stockl. The opti­on stra­te­gy in turn would be to sell a put opti­on to sell the stock toi GAMAG Vola+Value Ltd. to the mar­ket for 1/2 year for e.g. 10.

3 cases:
a) If the stock falls fur­ther after the opti­on sale GAMAG Vola+Value Ltd. is assi­gned and has to buy the stock at ghe pre­ar­ran­ged 100 level. But as the opti­on pre­mi­um of 10 must be coun­ted too, the real buy pri­ce after the opti­on pre­mi­um dis­count is 90 and thus the opti­on sel­ler is cove­r­ed for the next 10% down­si­de. In this case he or she always comes ahead com­pa­red to a clas­sic stock inves­tor.
b) If the stock tra­des side­ways for the next half year the opti­on sel­ler may keep the option´s pre­mi­um. So even if he or she has to buy back the stock slight­ly hig­her at e.g. 102 this is still pre­fe­ren­ti­al to having bought the stock out­right taking the gain after the option´s effect into account whoch over­all is 8 (loss 2 as 102 is hig­her then ori­gi­nal buy pri­ce but this is over­com­pen­sa­ted by the 10 in pre­mi­um recei­ved).
c) Up to the 110 level for the stock pri­ce the opti­on sel­ler comes ahead even if the stock clim­bs wit­hin the 6 month peri­od. The option´s pre­mi­um in all the­se cases results into an over­all yield of 10% or 20% per annum.

To sum it up the com­bi­na­ti­on of deep value thin­king and opti­ons cau­ses deeply dis­coun­ted buy pri­ces and a broa­der ran­ge of pro­fi­ta­ble buy pri­ces and an attrac­tive yield even if the opti­on is not assi­gned final­ly.