Ackman didn't take my question about collateral posting of the options trade. The IR said to me later that they can't disclose their agreements with their counterparties
I find it interesting that he talked about how they sold APD and bought deep ITM calls ($65 strikes) on that stock. The net effect was they freed up cash and effectively financed the exposure to the stock at a 4% rate (already taking into account the dividend). Its a form of leverage that is not short optionality (non-recourse)
I never really thought about using this type of leverage before but its an interesting method especially for non-US investors (like me and his fund, which is registered in Guersey).Since the dividend will be subject to the 30% US tax withholding, a lot of it will be wasted in that tax. By using that deep ITM call option, you get the gross dividend (pre-tax) as a counter factor to the libor financing.
The downside, that I can tell, is that the options contract is not publicly traded (I believe it was created in contact with the company). So it turns a liquid investment into a illiquid one. But it does increase unincumbered cash and its quite possible that the company (or a prime broker) could monetize the contract if it ever became necessary
This illiquidity doesn't seem to be a big deal because most of Pershing's positions are already iliquid in the sense that they can't be sold in a hurry. They use block trades with investment banks to get out of them anyway, so doing in the options side, I don't see much difference. But the extra cash will help
http://gluskinsheff.com/Assets/Documents/Musings and Special Reports/Breakfast_with_Dave_2016_04_04_Free_SocialMedia.pdf Good piece by Rosenberg I believe it makes sense now to be short Jan 2017 Fed futures (which is a bit like being long equities) but hedging that by being long SPX volatility (May exp OTM puts). I'm also longer in durations in my UST bonds My theory is that if the SPX doesn't pullback by May, that pretty much assures there will be another hike this year and at the very least the Fed futures contract will have a small gain. The pontetial for more hikes will also be real and the contracts could make even more The problem for the hikes would be if the SPX were to fall off a cliff now, then you have a new neutral/hawkish to dovish cycle were the Fed waits a few months after the SPX bottoms to start thinking about hikes. That would put a hike towards the end of the year or maybe not at all. Thats why it means sense to be long short-term SPX OTM puts as a hedge. It helps that vol seems cheap with the VIX at 13-14 with the Fed on exit mode
The last two tightening cycles the Fed pushed rates up by ~300bps in the first year after the first hike. This cycle might be special but it just baffles by that the market is pricing in around ~20bps for the first year after the first hike Maybe there is some probability of a recession with cuts/negative rates chances weighting in the markets mind but still, that seems pretty darn low. In any event, the hedge can protect the trade against such scenario
If you consider the upside resistance of SPX at 2100, then, if you are bull is just seems a much better bet to short the front end (whether through Fed futures or bonds) than to be long stocks. Especially given how much they have run, I'm sure the technical quants must be calling for a pullback. Hatizus (who I think does a fairly good job predicting the Fed), thinks there will be 3 hikes this year. I think it will be more like 1-2 but being short the Fed futures seem to offer decent exposure to a hawkish scenario with limited downside
As far as negative rates go, I simply don't think there is barely any chance of that this year. Recession or not recession. From everything I have read about the Fed, its simply nothing they are excited about. They didn't do it when the economy was in far worse shape, they wouldn't do it now, especially when it is going to look like a massive flip-flop on rate direction A similar thinking I believe applies to a rate cut but in a smaller scale This is why I view the downside as limited
In light of the many recent news I'm removing my VRX hedge. It was small and the potential for a big rise on the stock has increased a fair amount