VLCCF – Trade Entry – 19-Dec-2014

VLCCF has sold off massively into year end, mainly due to oil price. All small cap shipping stocks have been destroyed. Fortunately we sold 200 shares for about $14 earlier this year, so we have about $1000 profit to play with. So in Nov 2014 started selling puts against the position, with a view to getting either extra income or being assigned. Vol was high, so was a good play, however was still “early”. Sold $7.5 Dec 2014, when VLCCF was approx $8 in mid Nov, but got totally caned in Dec (but still better than buying stock outright). Put will be assigned (deliberately) today on 19th Dec at expiration on the close today.

Table below summarises our stock position, which has an unrealised loss of approximately ($8.08 average price - stock close price $4.71 x 560 shares = -$1887). However we realised a gain earlier in the year (May 2014) of $1011, selling 200 shares at $14.15. So our total loss on the stock is about  -$876. However we have dividend reinvested, so that is lowering the average price as well (hence the 60 or so extra shares, over the original 500 share position). Original cost basis was 500 shares at $9.79 = $4895. So loss is -17%, however given that stock price is down -%52 since purchase, that could be claimed as a small victory.

Our aim is to try and get out of this position, with a patient long term approach coupled with option trades and tactical stock sales to reduce overall cost basis.

Stock Position
Shares
Cost Basis /
Average Price
Cost Basis Principal
Existing VLCCF position3608.873193.2
Dec 2014 $7.5 put assignment (deliberately assigned on 19th Dec 2014)200$6.51300
TOTAL560$8.024493.2

The implied vol is 140% (very high) in Dec 2014, so are looking at volatility strategies, namely selling options. The stock is cheap enough (under $5) to consider very conservative put selling strategies, which when coupled with high IV makes it a good candidate for the philstockworld.com style trade (or longer term premium selling). We havent done this trade before, so will be conservative on the first one.

Look at the option chains for June 2015 shows the $7.5 and $2.5 puts. This trade was executed by selling puts and selling calls (premium on both sides).

VLCCF150619C7.5CALL (VLCCF) KNIGHTSBRIDGE JUN 19 15 $7.5 (100 SHS) -5 $221.07 $0.44/Share
VLCCF150619P2.5PUT (VLCCF) KNIGHTSBRIDGE JUN 19 15 $2.5 (100 SHS) -5 $313.12 $0.63/Share

This makes $221.07 (call premium) and $313.12 (put premium) for a total of $552 if VLCCF finishes in between $2.5 and $7.5 in 6 months time. What are the possible scenarios in Jun 2015:

Closes Below $2.5: This is effectively committing to buy 500 shares at about $2.5 – total option premium of $1.07 (or about $1.43 per share). This would be a bad outcome, and would have average price of about $4.75 on 1000 shares. Assuming stock would not go bankrupt (!) would have to look at option premium trades again (to further lower cost basis), or just buy and hold and wait it out. This would not be good, but would be way better than buy and hold from $9.79 to $1 to $2 range.

Closes Between $2.5 and $7.5: since the IV is VERY high there is a higher likelihood that vol reduces over the lifetime of the trade, so that will also give a way to profit even if stock doesn’t move anywhere over the next 6 months. This is like a “psuedo” dividend assuming the stock stays in a ride range – the options market currently prices this at about at 50% chance of happening, but if the IV comes down the percentage chance of it happening will be reduced as well. The “normal” IV for this stock is about 40% and that would price it at about a 75% of chance of happening (much better odds). The P&L here would be the stock P&L, plus about 5 contracts x $1.07 option premium or about $535 (the “pseudo” dividend). If stock price is over $7 by Jun 2015 expiration then this is breakeven on the currently unreleased open positions, however if you add the $1011 profit from earlier in the year, then the breakeven since position inception is approximately $5 (which looks achievable, and is not a bad outcome given that the position was started at $9.79).

Closes above $7.5 : If the stock is above the $7.5 strike in 6 months, then the entire position will be assigned for a profit:   –  $8.08 average cost basis + $7.5 strike assignment + $1.07 option premium = about $0.49 profit on 500 shares. That would make a small gain on $250, which added to $1011 from earlier this year, would give about a 25% profit on original position (and would have exited with VLCCF position with a decent gain, not having given up on it when it was a loser as it is today).

Note: There are an extra 60 shares that have been acquired due to reinvested dividends, but that would just be bonus profit (e.g. if closed at $10, then would get $2.5 * 60 shares = $150 of extra profit). But that was not included above to keep calculations simpler.