VALUE: After Hours (S03 E24): Option Pricing, $AMC, Lumber, Gravity and Real Estate

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In this episode of the VALUE: After Hours Podcast, Jake Taylor, Mike Mitchell, Bill Brewster, and Tobias Carlisle chat about:

  • Option Pricing
  • Real Estate Gravity
  • Jeff Moore – Distressed Real Estate Investor
  • LEAPS, Rodman & MJ
  • The Best Time To Write Put Options
  • Using “Greeks” To Understand Options
  • Unique Information Is Your Investing Edge
  • Options – Understanding The Underlying Asset
  • You’re Going To Get Dusted Speculating In AMC
  • SPACS As Cash Alternatives
  • VIX Call Options
  • Real Estate – What Does Low Inventory Mean?
  • Insure Your Portfolio Like You Insure Your Life
  • Universal Music Group Undervalued
  • Buy Leveraged Equities
  • There’s Money Everywhere!
  • People Are Predictability Insane
  • Flying Private

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Michael: Ours. [laughs]

Bill: It’s going to be good dude.

Tobias: All right, fellas. I’ve pressed the button.

Bill: I see. It says we’re streaming live.

Tobias: Streaming live. I don’t know if it buffers or what it does, but it’s–

Bill: It’s on. You just don’t know.

Jake: Yes, it is. Every time you think it’s not going, but it is.

Bill: So, welcome to Value: After Hours four-way session. I’m one of your four hosts, Bill Brewster, joined by my esteemed colleagues, Tobias Carlisle, Jake Taylor, and Michael Mitchell. Gentlemen, how are we doing today?

Michael: Living the dream. Living the dream.

Bill: You like how I threw back that intro?

Jake: Nice.

Bill: [crosstalk] do that.

Jake: It’s tight.

Tobias: That’s nice.

Jake: Well, what time is it around the world, Bill?

Bill: Ah, that I don’t know. But I do remember our old intro music. [imitates music]

Tobias: It’s still plays in the audio version. It still gets a nice little intro. I could probably find out how to do it through this thing too, the holding, but–

Jake: Too much work.

Tobias: Too much work. Too hard. As much as I love that music.

Bill: I want to hear legit intro music. Why don’t you pony up for that 2 Chainz or something? It’s only come on, I’d be like, “Yeah, [crosstalk] multiple y’all.”

Tobias: The Grace Mesa, I like the, How We Do.

Bill: Yeah. That was the outro, wasn’t it?

Tobias: It’s both. It’s for all. It’s different versions of different little riffs.

Bill: Yeah, that shit was hard.

Jake: I think we need to get Toby on the piano, and he’ll remix that.

Michael: There you go.

Jake: And then, we’ll have something cooking.

Bill: Yeah.

Michael: Toby on the piano, Jake on the guitar, put Bill on vocals, and I’ll take– [crosstalk]

Tobias: Concussion. [laughs]

Michael: Yeah. [crosstalk]

Bill: And more cowbell.

Jake: Tambourine, Mike Mitchell. [sound]

Tobias: Anything interesting happening in this market? We were just saying before we went live. It’s a little bit quiet at the moment. Never short a quiet market. Quiet before the storm. What do you think? What’s happening?

Bill: I don’t see storm clouds on the horizon.

Jake: Even from you, Hurricane Bill?

Tobias: [laughs]

Bill: No. But I do like that Bill is getting stronger. That makes me– I take energy from that.

Jake: Also said it was short lived, though. So, I don’t know–


Bill: No. That would be unfortunate. Mike and I talked yesterday about using SPACs as cash substitutes and what your risks are. I think there’s some probably interesting things to look at there. I don’t know there’s– I think same as always [crosstalk] spun some cheap stuff, some expensive stuff.

Michael: Yeah.

SPACS As Cash Alternatives

Tobias: Do the SPACs come back to cash or there’s some SPACs back at cash? Cash back?

Michael: There’s some SPACs around trust. Yeah, there’s some. There’s not a lot. SPACs have rebounded. I haven’t seen them today, but last week, they had a pretty good week, and Chamath is back in the green on a lot of these things. So, they’ve had a nice rebound, but I don’t think it’s crazy as a cash alternative, but they will correlate equities in a liquidity crunch. But outside of liquidity crunch– actually that’s what I spent all last week. We were talking about that, Bill and Toby. What could derail the market? What could derail the economy? I spent all week, all weekend, and I’m just back and forth in my brain what could do it, and finally Sunday night I just figured out I’m just incredibly bullish. I didn’t arrive at bullishness. I arrived at like, “I can’t figure out why this isn’t going to work.” I just something–

Tobias: Defined negative.

Michael: Yeah. It really was. Just the lack of like, “Okay, keep just subtracting and subtracting and subtracting and subtracting.” Just left with everything in the bottom looks pretty good for now. [unintelligible [00:03:35] its pretty good. These valuations, if you think the tenure stays at 1-4.

Tobias: Yeah.

Michael: You can pay anything. I mean anything. 50 times earnings. It’s cheap.

Tobias: Here’s the thing, though. If you use that Hussman method of assuming, mean reversion in the Shiller PE back to the long run average, which is 16 point something, there’s the assumption that we can all argue about that– Assuming that, you do that the valuation that you come– or the expected return on the market is now 0.7% total return, which includes a 1.4% dividend. So, that’s 0.7%.

Michael: Hmm. Juicy.

Tobias: Negative on the index for the next decade to get back to that. So, is that assumption legitimate or not? I don’t know. But it’s been pretty over the very long cycle that has been reasonably predictive. And where it diverges is exactly at these points like market peaks and troughs. That’s presupposing that we’re at a peak, but that may be the indicator.

Bill: I would argue the assumption pretty heavily.

Michael: Yes, they were definitely closer to the peak than the trough. Are we there or not? We’re definitely on that side of it. But anyway, Bill, did we change innings in the last week?

Bill: No. I don’t know. I still think the starter’s getting a little tired. We haven’t gone backwards. I don’t think, but I don’t know. I think you could have a scenario where the economy rips and the market doesn’t do well, but I don’t know with this much money out there, I just have a hard time buying that rates go up. If interest rates are the price of money, and there’s a huge supply of money looking for a small minority of good ideas, the idea that prices come down fundamentally doesn’t make sense to me.

Tobias: What about inflation? Like inflation– I didn’t look at this. I heard someone say, was it early expectations are at 5%? Is that insane? Am I way off base here?

Michael: No. I think that’s right. That’s the actual number. I just think the question is, if the debate isn’t whether it’s 5, the debate is 5 is going to stay 5, or is it going to go back to 2, or is it going to go to 1 or what’s the next–?

Tobias: But even at 2, if the 10 year is at 1.4, then, you’re negative 0.6% real, how sustainable is that?

Michael: You’re starting sound like Kyle Bass. Kyle Bass, I think today said real rates are negative 10%. You said you’re like, that’s his [crosstalk] Yeah, inflation is 12 or something and you’re real is [unintelligible [00:06:08].

Bill: What do you do? You shit the cash?

Tobias: [crosstalk]

Bill: Watching the cash gets torched.

Tobias: Well, no, you can’t [crosstalk]

Michael: Well, it’s the worst thing– [crosstalk]

Jake: Nickels. All nickels.

Michael: Doge. Doge.

Jake: [laughs]

Bill: Yeah. So, I don’t know. What do you do?

Tobias: SPACs. SPACs at cashback is not a bad idea, because at least you got– you might get some mark to market issues in a liquidity crisis, but at least the cash is there. It’ll get come back to you at some point.

Buy Leveraged Equities

Bill: You know the answer? The answer– this is going to make, Jake– he’s going to love this stance. So, the answer is buy the shit out of levered equities.

Jake: No.

Bill: It is. Because your debt is–

Michael: Clean the debt away, or it is crazy.

Bill: That may make you upset, but it’s not wrong.

Jake: I get it.

Tobias: Well, that does work. That works. If we go into an inflationary environment, you get the cyclicals that are highly leveraged, that’s the stuff that’s going to go bananas.

Michael: Mm-hmm.

Bill: Or a cable company.

Jake: Like a low replacement capex.

Michael: Yeah.

Jake: If you don’t have to pay with new expensive money for the capex and you pay back with this cheap–

Michael: Capital intensity cuts you. Yeah, especially if it’s truly maintenance and it’s not growth, it really starts to cut you. Just the problem I have with the whole thing is, there isn’t– So, everybody wants the prediction right and obviously wants to be right. But the problem I have with the whole thing is, I’ve never seen a post-pandemic playbook for the US consumer. I’ve never seen one.

If somebody has one, please send it my way. I’d love to take a read. But I don’t– I’m not sure the guesses of anybody, myself included, are any better than anybody else’s guesses, because we’re really in this funky spot of people were cooped up for a year, people didn’t pay rent and for a time– I’m not speaking for the world here, just myself, but for a time, I was like, “This could get really bad.”

So, there was this whole– when liquidity was drying up in the markets, I thought for my health, it could get bad, but then also the markets get bad, liquidity could go to zero. If I feel like I dodged a bullet. So, now, I’m like, “Hey, really YOLO,” not on stocks, but I’m like, “I want to go to a nice restaurant. I bought a new minivan, not recently the last year.”

Tobias: [laughs]

Michael: There’s this feeling that you want to– I don’t know how that– if that feeling sticks around for 12 months, or 24 months or 5 years, I’ve no idea. I felt there were some permanent changes post September 11th, and I wonder, if that’s the thing that we’re looking at here that we get this economic growth, and there’s some permanent changes, but in general, I think the real challenge is nobody’s seen anything like–

Tobias: What were the permanent changes after 9/11? Because I feel 9/11 is the last event that was on this scale.

Michael: Well, we all travel different, right?

Tobias: Yeah.

Michael: Post 9/11. The traveling is just–

Tobias: It took a couple of years to bounce back, and then it was back to normal.

Flying Private

Michael: But then structurally, we all structurally just travel different. It just takes longer. Traveling is much less convenient than it was in 1998.

Tobias: You fly private, don’t you, Mike?

Jake: Now, we’ve to wear a mask and take our shoes off.

Michael: It’s funny. Yeah. It’s funny you say that, Toby. The only thing I can’t do in the world that I want to do, I would love to fly private. I can’t do it, I can’t afford to do it. But even if I could afford to do it, my wife wouldn’t let me do it. She’s like– She’s has socialist tendencies, and she really believes in the environment. “It’s like the worst thing you can do for the environment, it’s so terrible.” And she doesn’t want our kids to think that that’s even a thing so. [crosstalk]

Bill: Get her on a plane and see what she says.

Michael: I know she’s never been on one. My job is two hedge funds–

Bill: Just don’t go on one. You’ll be fine.

Michael: I know. My old boss only traveled private. So, every time we go to a board meeting, it could be on a G550. That’s the dumbest thing. Three guys– By the way, half those trips I should have gone on, but they have to justify the $40,000 and $10,000 an hour trip by putting analysts on there. So, I fly on it. I have to tell you, it’s quite nice.

It’s really a different– You just drive right up and the pilot grabs your bag and puts it on for you, and then you sit there and you do anything you want, and then pretty soon you’re– it is different. But I’m not taking my wife on a private plane. She’s the one that don’t love private planes. That’s the one thing I can’t do. Everything else– I can get any minivan in the world I want but I can’t buy fly private.

Bill: I think that’s the only thing that I would really risk a lot for is to be able to level up to fly private.

Michael: It’s nice.

Bill: If Qurate part two comes around, and we’re on the phone, and you’re like [crosstalk] hard. Yeah, it probably needs to be private, would be the next level up. [crosstalk] buy some calls.

Jake: [crosstalk] what you want.

Michael: YOLO calls so you can get the Uber Premium Net Jet Special?

Bill: At least enough calls that you could level up your life, but not so many that you would level down your life. That would maybe be how I would think about that. I don’t know.

A Lesson In Option Pricing

Michael: It was so dumb on Qurate. It was right in those puts feeling like a hero, and it worked out quite well. It was the stupidest move. I should have bought the calls. You had the trade, what are you doing? [laughs] It’s like, what are you doing?

Bill: No, no, no. Wait. Will you talk about why you did that?

Michael: Broke the puts?

Bill: Yeah, because I think that that’s an interesting insight that you had into option pricing.

Michael: Yeah.

Bill: [crosstalk] we were talking about it.

Michael: For me with options, I view options, especially, your short-term options as being priced perfectly efficiently mathematically. It’s priced based on historical volatility, and so when I look at options, I almost never buy them, and I almost never sell them. When I look at them, I think I’m going to mispronounce his name, but Ben [unintelligible [00:11:42], his name. In my mind, I assume that when I’m buying or selling an option, I’m buying or selling it to or from him. He’s a lot smarter than I am. That’s his entire job.

So, I only venture when I think that there’s a chance that I know something that Ben doesn’t know. It’s something in the business or in the world in security changes and structurally changes what you think the future pricing of that option is going to be. The models that price options are computers that trade those, trade them perfectly based on historical information. But if the future is going to look very different, that’s just lifted from Greenblatt. That’s not me. That’s directly from the pages of You Can Be a Stock Market Genius.

For Qurate, and for the spins, and special dividends, the options price based on the value of the equity– If the value of the equity is going to be returned to you in cash, if it’s going to be given to you in a different security, like a security in a different type of a business, then you can– What I saw specifically in Qurate is, it was a $10 common before this entire event happened. I could write a put and struck at 10 bucks for $2.35. So, think of it as a 23% premium, and it was about 18 months of duration. Forgetting whether that was a good price, 23% for 18 months was a good price or a bad price, forgetting that for a second, what I knew was if you just waited a month, they were going to send back $4 of your what was it, $4.50, Bill?

Bill: Yeah.

Michael: The $3 preferred, $1.50 in cash. In my mind, I was like, “Well, I’m not insuring $10 of equity here. I’m ensuring $5.50 of equity.” Now, you’re paying me $2.35 to insure $5.50 in equity that I feel pretty good about, it’s two times earnings. By the way, give me that premium, and then the thing does crater, it’s like I basically am buying stock at one times earnings. Is that a good price? I was like, “Well, that makes sense to me to do that.” Then, I also have the view, as you know, as you shared that, there was a good chance more capital could be coming back.

And sure enough, that’s exactly what happened. Instead of insuring 10, which is how the options market was pricing it, I was insuring immediately after this event, $5.50 in equity value, and then we got another $1.50. Actually now, that puts only insuring $4 of equity value, and it’s a $2.35 premium. So, it’s a 60% interest rate to insure that for 18 months. It just seemed that was probably mispriced, and then now of course because the equity went up, that’s basically [unintelligible [00:14:14] securities. That was a nice pay day. I wrote that I think 40,000 times something like that.

Bill: [laughs]

Michael: It could have been pretty good. It worked out. Worked out. Was that too much, try not to disclose that information.

Bill: No, no.

Tobias: In that scenario, you’re trying to clip out the vol rather than what buy it– You didn’t want to pay the vol on it.

Michael: Yeah, I probably could have– if I would go back and do a now postmortem, I think the conclusion I would have come to is, if you really believe– You had to understand too, I had 45% of my invested assets in the common as well. So, if you add it in the puts, if they got exercised even after the distribute, added the puts in after all the distributions, my exposure to the common would have still been 35% of my book, and the problem is it’s 35% if it doesn’t work, so it’s the worst case.

Psychologically, it messed with my head, but I think if I do my postmortem and went through this again, I think that conclusion I would have come to is like, “You’re an idiot. If you really believe in this, don’t put your exposure on the put. Put your exposure on the call and just burn the premium.” If it works, then you’re going to get the distributions, you get access to those distributions through the call, because the calls adjust, all the options adjust when the distributions are big enough. You’ll get exposure to that, and then of course, you can get leverage on the ops instead of thinking that the puts were mispriced. I can tell you the puts were wildly mispriced. It’s very rare that that happens, but they were wildly mispriced. I think they probably should have been 50 cents, 40 cents, and they were trading for $2.35. So, it seemed a pretty good short. That was basically my only real short last year and it ended up working out pretty well.

I think the answer would have been buy the calls rather than the puts. But you can find those– When you see these spends and splits, actually with AT&T-DISCA, if you were going to do something, that’s probably the play, is play it to the options. You could buy leaps on T for nothing. That was something I was looking at, and I haven’t done anything with it. But those options on big events can be wildly mispriced.

Wildly mispriced. I think options in general are not mispriced. I think if people like Ben, who figured that out really quick and they can take advantage of those mispricings, but if there’s a big change in the underlying business. In Qurate, there wasn’t a change in the business. There was just this huge change in how the equity was constructed. Which by the way, I tweeted this out last week, shoutout to Liberty, that’s fucking unbelievable what they did. Those preferred were trading for 16 and a half times earnings right now, 16 and a half times cash flow and the common’s still at 4, it’s just that worked.

Bill: Where are they trading, like 110?

Michael: 110, yield to redemption. This is the 10 year out redemption. I’m assuming not the five-year redemption option. You got to the 10-year option. I think it’s like 6.1. So, it’s about 6.1 yield to worst if you just import that into a multiple it’s probably close to 17 times now.

Bill: Dude, you know what’s crazy? Those traded down to 88 and the common traded down to 588.

Michael: You want to know what’s worse? Let’s talk about our Ls. I sold them at 91 the ones I got– [crosstalk]

Bill: That I remember when you said that. [chuckles]

Michael: Yeah, because it was taxes, right?

Bill: Doesn’t matter very much.

Michael: Yeah. I know.

Bill: But they remember when you did that.

Michael: My basis in those was allocated it like 117 or something. They had that basis out [unintelligible [00:17:39] 107. I had this big short-term loss, and I was like, “Awesome, I need short-term losses.” So, I sold them and just literally the second that my sale cleared, it went to 98 or something like that. I was smart enough, I bought them all back and more.

Bill: You know who called that right? SirBaby6. He was a–

Michael: Oh, yeah, SirBaby [crosstalk]

Bill: When those preps went down, he was like, “This is the bet.” I never saw the juice in the press. That was the problem for me.

Michael: Well, to be honest, the bet was actually just to take all your proceeds from the prep and put it in the comment.

Bill: Yeah.

Michael: It was a four bagger from the bottom, or three bagger from the bottom I think now. So, that actually was the common is the place to be but the press were– if you were just looking for safety and yield the press were great. I’m a little pissed that the press were now 110, because I was using them as a cash proxy at 110 and I’m no longer cash proxy as my security. Anyway, that’s put writing. It should have been called buying, it’s put writing. It worked.

Bill: Call buying’s a little more risky, though, in that situation.

Michael: Yeah.

Tobias: Well, it’s depends on the scenario, right?

Michael: Yeah, it depends on what happens. [laughs]

The Best Time To Write Put Options

Tobias: If there’s a lot of vol in the stock– I like writing puts when there’s something that I know really well and everything– there’s some little crisis, something falls over, and then you write them get a little bit cheaper than you would otherwise get them maybe they’re not exactly where you want to buy them. I like calls or leaps, where the market hasn’t done anything for a long time, and it’s in a very good stock that keeps on– the underlying business is compounding away. It’s just that it got expensive 10 years ago, and it’s just done nothing. So, there’s no vol in this [crosstalk] at all. It’s completely quiet. Nobody wants to buy the options. You buy the LEAPs for two years that where it’s getting to that point where it’s getting silly cheap, and then you get the big moves, I found from those.

Bill: All right, so, let me throw this one at you. The homie Bluth Capital of– We went to dinner a couple nights ago, and he threw this one out. Ford, super low implied volatility working on an EV that could be pretty damn impressive. What happens if Ford turns into an EV stock and you own some low vol calls?

Tobias: That might work. It might work.

Bill: [crosstalk] I don’t know. That’s one of those scenarios. He was just like, “I’m not saying that it’s this slam dunk trade,” but it’s one of those that your stock starts going up and your volume could go up too. That’s a pretty nice combination in options world.

Tobias: Yeah.

Bill: I own none. I will own none. I’m just saying.

Tobias: You’re not tempted to play AMC? It’s that all the vols in there right now. I was joking [crosstalk]

Bill: I got my face ripped off in– Well, I got ripped off in Tesla. That was the highest vol that I ever–

Tobias: Which one?

Bill: Just last year, or [crosstalk]

Tobias: What we’re trying to do in it?

Bill: Oh, I was just trying to fuck around and skim premium. Selling spreads at the wrong time, and because I can’t get myself to buy the options when there’s that much vol. Because I’m just convinced vol crush is going to screw me. Then, my brain rather than saying, well, this is too hard, because it’s my retirement account and I treat it like a dog that I hate. I’m just like, “Well, just sell the options. Who cares?” Well, it turns out that hurt my returns in that account. [laughs]

Tobias: The best book to read about this, because I saw the question come through is just read Greenblatt’s yellow book, You Can Be a Stock Market Genius, or how to be a stock market genius, whatever it is.

Bill: You really want to nerd out, you could read-

Tobias: There you go. You can– [crosstalk]

Bill: -Natenberg, on Option Volatility and Pricing, but don’t do that. There’s better places to spend your time.

Tobias: The yellow book is– [crosstalk]

Michael: I see those questions Ben will post on like, “Hey, you want to be a junior analyst in my firm? Here’s an interview question that you ask.” Every single one of those, I’m like, “I have no fucking idea what you’re talking about in this question.”


Michael: If you gave me that, I would be like, “Can I make you a coffee? I don’t know how to answer that question.” So. I just stick to that one for stupid people.

Bill: Yeah.

Michael: It gets you the most of what you need.

Bill: Yeah, that’s a good book.

Options – Understanding The Underlying Asset

Tobias: You don’t need to know the option value mechanics so much as you need to know what happens if the underlying moves in the direction that you think it could move in a material way that is not accounted for in the normal distribution of the option pricing that’s used to calculate the current price.

Michael: Perfectly.

Bill: And for the beginners out there, you also got to know how much volatility is in the option, because it is easy to pick the right strike and still lose money. Or, theoretically, the right strike, you wouldn’t lose money, but if you lose a lot of volatility out of your option, you can be right on the direction and still lose money, is what I’m trying to say. So, I don’t know how all these Robinhood kids are doing this stuff. Stocks are hard. Options are next level shit.

Tobias: Well, everything’s been going up.

Bill: Yeah.

Tobias: So, you buy the calls and everything goes up, and it gets to this point in the market where I left long ago. JT probably left before I did. There’s not many of them, all the value guys are gone. And then, the only people left are fearless, dancing on the edge of the cliff. If you buy at that point and it keeps on going up from there, then you make a lot of money, because there’s no one there to push the options back into one, but this is massive.

Michael: We need a theory about this, something about how I buy and then I expect to find somebody dumber than me to buy it for me. We need one of those. Is there a theory that explains this? I don’t know if there is– [laughs]

Jake: Still working on it.

Michael: Yeah. [laughs]

Michael: I’m happy for him.

Bill: I still think these compounders that are 3% to 5% free cash flow yields can really work here.

Tobias: A second FAANG type names?

Bill: Yeah.

Tobias: FAMG.

Bill: Yeah. I don’t own it.

Tobias: [crosstalk]

Universal Music Group Undervalued

Bill: But I can see why people own TransDigm. I can see why people own– I do own Disney. I think Disney is not easy to swallow valuation-wise to me, but I see like I know why own it. This Universal Music Group asset is a really interesting asset. There’s some of these things that I just think can work. It’s got to be high return on capital, you’ve got to have massive reinvestment runways, and you’ve got to be right.

Tobias: Margins.

Bill: That’s it. [chuckles] Figure those out. Let us know. [laughs]

Michael: Way up. No problem.

Tobias: I think there are quite a few of those around in the market. I think there’s some reasonable value stuff.

Bill: [crosstalk] I haven’t looked for Fastenal trades. I bet Fastenal is [crosstalk] from here.

Tobias: [crosstalk] is cheapish.

Bill: It’s fine from here.

Tobias: If they can re-invest.

Bill: Because those assets just haven’t gotten the bid. You know what I mean? They’re not the crazy bid assets. They’re more like, if rates go up, you’re screwed, but if you’re playing a wealth preservation game, I understand betting on that.

There’s Money Everywhere!

Michael: There’s money everywhere, everywhere, As your remarketing is something in my mind, I’m like, “You have UMG is 20 times EBITDA, why would you be 20 times–? Why would you pay that? He answers, “Well, interest rates are 1.4 which is 20 times,” but it got me thinking that there is just– this is part of that other conversation about what could derail it. I guess interest rates is the only answer. There is money everywhere.

My business partner is going out to buy private assets in [unintelligible [00:24:48] and restaurants. The bids are insane. You think housing is insane, and it is. You get these offers at or above asking in a lot of cases and we hear all these anecdotes. Private businesses, the same thing. He shows up to buy assets that he’s qualified for, has the money for, offers a good price and he’s like, “Sorry dude, there was eight bids over offer for this restaurant franchise group he was bidding to buy in the–” [crosstalk]

Tobias: Yeah. Bidding at the offer, that’s an insult.

Michael: Yeah.

Tobias: That’s an insult.

Michael: In all seriousness, there’s just so much money out. Blows me away. So, you’re probably right on UMG. My mind is like, “20 times EBITDA?” but the answer is probably no. Why would you go to 25? Why not go to 30?

Bill: Yeah, well, double-digit growth for a long time and high returns on capital can work all.

Michael: Yeah, with a lot of ways to win.

Real Estate – What Does Low Inventory Mean?

Bill: My mom is in Scottsdale, realtor, shoutout to her. The stories she tells me are insane right now with the housing. She’s going around door knocking on behalf of clients, and then hoping that somebody hasn’t already done it. That’s crazy. There is no inventory out there.

Michael: Yeah, that’s the problem. That’s the problem. I have this belief that– this is my hope, please, home builders do it. But I have this belief that home builders like to build. So, my guess is that they start building again, it solves this inventory problem, and housing right now, inventory is a very real problem. There’s just not a lot of inventory. You’re seeing in pricing, and you’re seeing builders defer starts. My hope is that changes but I feel bad for your mom. There’s just nothing– realtors are losing on that, because if there’s no inventory, there’s no transactions, and guys who do, contractors who do repair and remodel, those guys, their business is down.

I posted this on Twitter today. I could get him on Spaces. He’s a really nice guy. But he’s only in Northern Colorado, and so I asked him about business, and I was like, “You must be slaying it.” He’s like, “No, you don’t understand. There is one-third of the normal inventory at this point in the year that we would expect to see, and so my call volume– People only call me when they buy a house, it’s an existing home they want to move into and they want to remodel it. My calls are down 60%, 70%. Nobody’s calling because there’s no houses for sale.” He’s like, “On the one hand, start building new homes, then you’ll get moved out, move up.” He thinks that existing will start to turn. He’s like the demand is there, but when homes don’t transact, people just don’t remodel.

Tobias: Why are they not transacting, because it’s still everybody’s still under COVID restrictions?

Michael: We don’t have enough homes in the country. Bill, you look like you’re about to jump in. You can jump in anytime. But– [crosstalk]

Bill: I’ll tell you exactly what happened with us. I had a realtor that called me. She gave me an unsolicited offer on the plot of land that we bought that was 70% higher than we bought it in October. I said to her, I was like, “Okay. I respect that you’re trying to make a transaction happen. So, here’s how you can make that transaction happen. Bring me another plot of land that I’ll be happy with, that I can actually afford.”

Because the problem with this and she didn’t like how I said this, but I did it and it’s the truth is I was like, “You’re the only one that makes out okay on this, because you’re going to make 6% on the transaction on the front and back end, and I’m the one that’s going to lose 6% of the equity value of the total transaction size and the size is higher. I simply don’t want to pay that much just to make a transaction happen.” So, you can get creative, I’m down to do it, but I’m not just going to do it.

Michael: Yeah, that’s a problem. When you sell your house, when you sell your land, now we’re going to build. That’s why existing homes aren’t moving is because where are they going to move to. My wife wouldn’t let me sell our home in Fort Collins, unless I presented her with another home that she liked even more in which case it would probably still be a discussion, but there’s nothing for sale. That’s the problem. I can’t sell our home, because I wouldn’t have anywhere to move us and my wife’s not going to move into apartments.

Bill: Somebody out there that’s asking, “Well, why don’t you rent?” The answer is because I try to make my wife happy every day, and she doesn’t want to. That’s it.

Tobias: [laughs]

Michael: That’s the answer.

Michael: I had lunch with Greenwald last week. Greenwald Cap shoutout. He’s the nicest guy in the world. He did that– He buys homes for a living. He bought a home, lived in it, and then he just sold it and he’s running now for the first time in his life. So, that does happen. He’s also not married. He doesn’t have kids. That’s not happening in my house. Doesn’t sound like it’s happening in the first round.

Tobias: Yeah. You’re not a value investor until you’ve sold your house and told your pregnant wife you’re going to be renting for a little while. That’s when you are the real thing.

Jake: And you lived in it for 10 years.

Bill: Yeah. Then, you lose half your shit when she leaves and you think, “Ah–” [crosstalk]

Michael: Oh, I made out like a bandit on that one. Good deal. Good trade. Good trade.

Tobias: JT, do you want to do some veggies just before we run out of time?

Real Estate Gravity

Jake: Yeah, sure. This is going to be titled Real Estate Gravity.

Tobias: That’s good timing. Good segue.

Jake: Right. Maybe it’s helpful. I don’t know. So, in gravity, it’s inversely proportional to the distance squared of the sphere body that is emitting it. I always wondered, I don’t know if you guys ever did, but why is it squared? What’s the mathematical relationship that’s happening there that we end up with that equation? Maybe I’m the only one who was wondering that, but [laughs]

Tobias: Some Newtonian physics there. I do physics.

Jake: Well, it’s actually simple. I’ll try to explain it. If you imagine that gravity is spread out around a sphere, like a light bulb emitting light around it, and as you move further and further out away from it, that same amount of gravity has to be then spread over an increasing surface area, because the surface area moves up as you make a bigger sphere. So, let’s imagine like a beach ball. And you have a certain amount of paint that you have in a little can and you have to spread that over the beach ball. Well, at one size, you can get a thickness to it, a certain thickness. But as you inflate the beach ball to 2x, it’s actually 4x the amount of surface area now on that beach ball, and you have to spread the same amount of gravity paint around it. That’s why the relationship is what it is.

It turns out that attractive locations in real estate in the world mobility are like large planets. There’s actually this mathematical natural law to it that researchers from ETH Zurich, MIT, and the Santa Fe Institute found. They used anonymized, aggregated mobility data from cities all around the globe, and what they found was that there’s a law that governs basically the number of visitors to any location, and it’s related to how far they’re traveling and how often they visit that location. So, it’s intuitive. People visit places more frequently when it’s a shorter distance. It just so happens that it follows that same natural law of gravity, where it’s inverse of the square.

You can imagine why this is helpful, is that it gives a baseline in cities, where you can see certain areas are overperforming what would be expected of based on the distance and the and the number of travelers that are moving around. It can also really probably help city planners to figure out like, “Okay, where do we put certain amenities? How should we set up public space, parks, things like that,” And then, also, conform public transit. My favorite thing is when you can find something in the natural world, something mathematical or physics based, and then find the human analog to it where that same principles, the same properties hold, and I thought this was an interesting one for real estate people and maybe a new way of looking at it.

Bill: You should trade using Fibonacci sequences.

Tobias: [laughs]

Bill: I’m glad that joke went well. Is that controlled for– I don’t fully understand the analogy. I’m sorry, because I’m just thinking the amount of visitors, there’s such a high density among the coast and water. Did they control for certain things? I’m just trying to really understand what you’re saying.

Jake: I didn’t see anything that specifically pinpointed water or things like that. But I think what they’re saying is that the– There’s a baseline of what to expect based on how far away that people are from it, and the number of trips that they make. That can then tell you what the likelihood is of the attractiveness of it.

Bill: Okay. For instance, if you wanted to build Disney World, you would maybe say, “Okay, well, these are the surrounding populations and the roads that come in. So, probabilistically this is where you should think about building.” Is that we mean?

Jake: Yeah, exactly.

Bill: Okay.

Jake: How many trips did those people take, and how far away are they?

Bill: Okay.

Jake: It decays at that same square root proportion as gravity does.

Bill: Huh. That’s interesting. All right. Cool. It clicked, thank you.

Jake: [laughs] That just made my day.

Tobias: Can you use it as a value tool? Can you say that this thing’s further away from this thing. Therefore, it should be– a valuation relationship should exist between them.

Jake: I think maybe idealistically, it might be something that you could infer that this is an underperforming asset relative to the number of visitors that you would expect from a baseline of what the math would tell you, and maybe that there’s something that you need to do to– it could more easily be fixed potentially.

Bill: I wonder if this is why Orlando took off, because if you just think of Orlando in a vacuum, I know Disney was there, but that is a shitty part of the US to just pick a city.

Tobias: Send all of your hate mail to–

Bill: [crosstalk] Central Florida hate mail. I will take and field. I would be happy to debate this.

Michael: Fine.

Bill: But I wonder because there’s a lot of interstates. It makes a lot of sense. It’s really centrally located and whatnot. Actually, I think Orlando’s nice city now. It’s just why it’s there. I don’t understand. But this probably has something to do with it.

Jake: Yeah, what’s interesting is that regardless of where in the world, because they had London, Japan, Chicago, I think was one of them, it’s just a human phenomenon. It’s not any particular culture.

Bill: Hmm.

People Are Predictability Insane

Michael: It’s fascinating. People are fascinating. I do these walks every day for an hour. It’s just my meditation time, and it’s time for me to reset my psychology every day, because my psychology will get messed up. By the way, Twitter’s the worst for psychology. It just messes with your head, and so I take this hour that I walk. I was thinking today on my walk, I was like, “People are just funny.” In some ways, it is just so predictable, and other ways, it is just completely insane, and I love them. They’re my people but they are crazy. So, you’re starting– [crosstalk]

Tobias: Predictably insane.

Michael: Yeah, predictably insane. It’s good way to describe it.

Tobias: Given that there’s probably a mania in housing at the moment, is that fair? Does that just fly in the face of everything we’ve just said?

Bill: No, I think you’re right when it comes to Phoenix. I don’t know if you’re right all over. I think that the supply shortage drives more than maybe you can say as a mania, but if it normalizes and goes down quite a bit, I don’t dispute what you’re saying that prices are stiff right now for sure.

Tobias: But there’s a little bit of something going on the stock market too, right? There’s something happening in the stock market. You’ve got to give me that at least. I think– [crosstalk]

Bill: When is the last time–? Yeah.

Jake: Rates, bro.

Bill: Dude, I do give you that, but I’m just saying, when’s the last time you didn’t think there was something going on in the stock market, like real talk. When’s the last time– [crosstalk]

Tobias: 2014, 2015?

Bill: Yeah.

Jake: March 2020.

Michael: [laughs]

Tobias: Secondhand cars, explosion in pricing for secondhand cars, just about any series that I can think of, everything’s taken off. If you dump a whole lot of money in the economy, it turns out that results in the individual things being valued more highly and the units that have been released in the economy. So, [laughs] you don’t think there is some reckoning from this at some point?

Bill: Great. Can we just wait for second? Can we just talk about real quick? The equity market was pretty smart to sniff that out a while ago, because ultimately, who ends up winning are the owners of those businesses.

Jake: Like 2010? When did it sniff that?

Bill: Yeah, it’s been right for a long time. I think underlying–

Jake: 1982?

Bill: Dude, underlying earnings growth and the return on– Well, we’ll see. We’ll see.

Tobias: The last sprint we have earnings is like 1230, I think 1231 for the S&P 500. I was trying to look at it this morning, and it’s down 34% from its peak. So, clearly, that first quarter is going to be some different numbers, we’re probably seeing a fair bit of recovery there. It’s still expensive. The reason I talk about Shiller rather than a single PE is that it’s smoothed over a decade.

Jake and Bill: Yeah.

Jake: What are the comps of 2020 and 2021? They’re almost– try to throw them away, go back to 2019? I don’t know.

Tobias: But there was that argument for a long time that Shiller didn’t work because 2008 sucked so bad.

Jake: Right.

Tobias: It’s the whole point of it. Then, it rolled off, and I said, “Now, you’re going to see it start getting cheaper again,” and market doesn’t look cheap to me.

Jake: Really, huh? [laughs]

Michael: Not historically cheap. It’s only cheap if you compare it to interest rates. Frankly, that’s the only argument I’ve heard that makes any sense.

Tobias: So, the pitch is going to be so–

Jeff Moore – Distressed Real Estate Investor

Bill: Real quick though, I’ve got to give like– Richard Sosa, he does a podcast and I just listened. There’s a guy, I think it’s Episode 17, I don’t know the guy pitched Thrive. What I would say if you’re a young, aspiring value investor, and you hear us talking like this, that dude called up the company and said, “Can I get a list of all of the shareholders from your company?” The company sent him the list.

They were obligated by law. He then called each individual person and said, “I know that you may have warrants from the dex debt that you own,” dex like Yellow Pages index, “I’d like to buy the warrants off you.” People had no idea what they were selling this guy. This guy just vacuumed up warrants that are not traded. So, there’s stuff to do. I guess that– and there’s always something going on. So, if you’re young and you hear a curmudgeonly guy saying that the stock market’s not cheap, it doesn’t mean don’t do work. Mike changed his life by cold calling Kyle basically. There’s shit to do.

Jake: I agree with that.

Tobias: Mike doesn’t take– Sorry, JT. Go on.

Jake: I was just going to say I’ve probably never been more bottom up than I am right now.

Tobias: But we’ve got Mike Mitchell that doesn’t take any beta risk.

Unique Information Is Your Investing Edge

Bill: I admit. I have market exposure through my wife’s 403B. She works for a hospital. So, market exposure there, but otherwise, I’ve basically only have one stock. It’s just funny how things work. Imagine if he didn’t answer the phone, or I guess maybe I would have put more money in Qurate, who knows? But yeah, it’s funny how things work, man. Bill’s not wrong. If you’re young, and you’re looking– The money in my opinion is made when you’ve got a unique piece of information.

That doesn’t mean that, you know something about the company or– it’s not inside information is not what I’m saying. You got a unique piece of information. To Bill’s example, the guy was cold calling a shareholder list from Sosa’s podcast, he had a unique insight. The unique insight was, “I might be able to buy this from somebody who has no idea that they even own it. I have a view that this could be wildly valuable.” My unique insight was that I called Kyle and I actually thought Kyle knew what he was talking about. I thought he was smart, I thought he was going to make me money. So, that ended up being a pretty unique insight.

You can find things to do. You can find unique insights. By the way, you don’t have to be a professional. I was retired when I did that. I don’t know where this came from. You don’t have to be– You don’t need the resources. In fact, I would argue that those resources, the expert networks Bill was talking about, everybody’s using those. That’s not a unique piece of– You’re not going to get unique insights from those. You’re going to hear what everybody else is hearing, which might be useful. It’s not unique. To Bill’s point, you can find things to do. It takes a lot of work and takes a lot of creativity.

You’re Going To Get Dusted Speculating In AMC

Tobias: I don’t dispute that there’s stuff to do. I’m just saying that– in some ways, I’m talking more of the people who are speculating in AMC and that sort of stuff–

Bill: No, that’s crazy. That’s crazy.

Tobias: You’re playing the wrong game there. You’re playing in a game where you’re going to get dusted at some point.

Michael: Right.

Tobias: If you’re the kind of kid who’s calling up people to buy their warrants on some forgotten deal, that’s quite a high level of sophistication to be doing that thing, and you’ve figured something out. But that’s not what I’m talking about.

Michael: Yeah.

Bill: Yeah.

Jake: Some cocoa beans.

Michael: AMC can’t go. Not so right now. [crosstalk]

Bill: AMC, if you put a gun to my head and said do something, I’d try to sell the longest stated out of the money leaps that I could, and they’d be calls and I’d be covered on it. It’d be some sort of call spread and then sell them and I just try to have a ton of time.

Using “Greeks” To Understand Options

Michael: The trade with GameStop actually, a buddy of mine, [unintelligible [00:42:52], he was selling $3 puts or something, and he was getting 30, 40, 50 cents. These are one week puts, because the vol got some nuts. He was like, “Look, they have more cash per share than this.”

Tobias: Yeah.

Michael: Two weeks out, he was stripping premium out of writing inputs that were– when the stock was $300 by the way, he was stripping– people for some reason they’re paying him 30 cents to underwrite a $3 strike, expired in a week or two weeks. [crosstalk]. You can’t pull out a ton of money by doing that, but I’ve pulled up 20, 30 grand, because it’s a real number. It moves the needle.

Jake: Is that like buying shark attack insurance or something?

Michael: I guess.

Jake: [crosstalk]

Michael: You never knew with banks and machines, how they’re trying to– It’s always when people would look at Baupost 13F. That tells you part of the story, but it doesn’t tell you the whole story, because then what you’re seeing on the 13F maybe a hedge, maybe a macro bet, he may have 15 different derivatives around it that you just don’t see, he may have some international longs or shorts against it.

So, whoever was selling those puts, whoever was buying those puts from my buddy, BWK, was selling, it may have been some weird hedging thing that I just don’t understand. But just sitting back as a fundamental guy, I’m like, “Dude, I think after at the head $4 a share in cash, you can underwrite 3 bucks a share for two weeks on $300 stock and make 10%.” It doesn’t strike me as a bad idea.

Bill: If you’re that far out of the money, do you even have much gamma in those? You’ve got no delta.

Michael: I just don’t. I don’t think so.

Bill: What do you even have?

Michael: 30 cents of premium.

Bill: Vol. You must have a lot of vol risk. That’s what you got.

Michael: [laughs] Must be the vol risk. Really, it must be the vol risk. I don’t know why– [crosstalk]

Bill: That’s the only Greek they can move, I would think, because you so damn– You’re so far out of the money. I was thinking in my head, maybe you’re trying to do a reverse gamma squeeze or something, but I don’t even think there’s enough gamma there.

Tobias: You don’t talk about the person buying them.

Bill: Yeah, that’s right. Yeah.

Tobias: Why’s somebody buying them there?

Bill: Yeah, right. You’ve got to be getting longer vol. [crosstalk]

Tobias: Well, the person buying them is like, “You know what? This thing could be a donut, and this thing’s going to pay off massively if I can get–” I don’t know, it’s not a very good argument.

Bill: Yeah.

Jake: I want my $3 back. [laughs]

Tobias: Like a tin bag if this thing goes to zero.

Bill: Yeah.

Michael: So, think of me, I wrote this puts on Qurate for $2.35 in premium. Right now on the screen, there is no bid and the offer is 25 cents. If I want to unwind them, I can unwind them for 25 cents right now, and I would take– Right, my account has margin capacity that’s been taken out as a result of these calls.

Bill: Yeah, you’re freeing up capital.

Michael: I could buy my way out for 25 cents, and I already made a ton of money. So, what do I care? That could have been the strategy the [unintelligible [00:45:40] plays. Look, I’ll just go ahead and sell these back to you, and then I can just free up my account from that, and I’ve got a gain, so it doesn’t really matter. I’m happy to give it up for me. I don’t want to give it up– Right now, it’s short term, and it’s going to expire, worthless and what do I care. I don’t go on margin anyway. I could see a scenario where somebody’s already made so much money that they come in buy a security where to you, it doesn’t make sense, but to them, it’s freeing up some capital or something else.

Bill: Hmm. Good answer.

Jake: Go longer on the super out of the money calls, the other direction. [laughs]

LEAPS, Rodman & MJ

Tobias: I like doing this little– I like selling puts about a quarter out, so you’ve got about a quarter to run and then trying to get about 40% to 45% internal rate of return on them, which ends up being about 10% return on them, because I think that the quarter that you’re in right now is always pretty heavily traded, and then there are people looking at LEAPs, and there are people looking at the year end, and there are all these points where people are looking, but the next quarter I’ve found is often a good one for pricing, for whatever reason because you got to take a little bit–

Bill: When would you low them? How do you know they expire?

Tobias: I’m just looking at them like this is a special situation that I can take advantage of, and then the opportunities that will change when it comes to the next quarter, it’ll be a different set of stocks in a different strike on the options– I don’t plan on systematically staying in the same position for an extended period of time.

Bill: Then, you layer on a value screen on top of that?

Tobias: I start with the value screen.

Bill: Yeah.

Tobias: I’m only looking at stuff that’s undervalued. I’m only looking stuff that’s got no volatility in it. That’s for the LEAPs. For the puts, it’s the other way around. They’re already undervalued, there’s a price at which I’ll buy them, and then I’ll write my puts. So, it makes sense, given the premium that I get, and where I see the value in a worst-case scenario, so you can– And then, on top of that, you’ve got to get the decent return, enough IRA.

Bill: Only thing that sucks about that is sometimes you win by the stock ripping, but you don’t have enough delta exposure to that. You’re almost like it’s cash inefficient. I like that strategy but it’s just how you’re losing that one.

Tobias: If stock’s not quite cheap enough for me to buy it there–

Bill: Yeah.

Tobias: –I can see there’s a lot of vol, and I can see that if it got down to this price, and I’m not–

Bill: Then, you’d be fine.

Tobias: I just want to get paid at that point for– I’ve figured out it’s cheap, I’ve figured out it’s got vol in it, I can get paid, if it falls to the price where I want to buy it, then I’ve been paid to buy it there, and that’s great. If it doesn’t, then I’ve done something.

Bill: Presumably, you have cash in this scenario, because you don’t want to sell something above–.

Tobias: I would never do it.

Bill: May be worse.

Michael: May be cash covered. Yeah.

Tobias: It’s always cash covered.

Bill: Yeah.

Tobias: And it’s always sized to the notional, so it makes sense for my portfolio. I’m not doing any of that stuff now. I’ve got other things that I run that I don’t do that, but before I had those things that I was running on, I did do that a lot.

Bill: Do you remember the night we met? Do you remember what we talked about? It was very impactful to me. You obviously meant more to me than I meant to you.

Tobias: I’d drink more that you had. [laughs]

Bill: We basically just [crosstalk] out of roof and talk about option strategies for a long time.

Tobias: Oh, that’s good.

Bill: Yeah.

Michael: Probably something that should be stated is everybody listening does not have a lot of experience with options. If you’re going to sell puts, understand the big risk that you’re taking is there is a liquidity crunch, and the market just vomits, and it’s an opportunity cost, you have to buy the security that you promised to buy, and it might be 50 other securities you’d rather own, but you can’t, because your money is tied up, because you wrote those puts.

Bill: Also, don’t trade options.

Michael: Yeah. You know what? Even better [crosstalk]

Bill: Degenerate gambler shit. Don’t do that.

Michael: Don’t do that.

Tobias: If you’re selling puts, you’re taking equity downside risk and you probably not getting paid enough [crosstalk], but if you have a view about the valuation and there’s a point at which you would like to buy it, and you want to force yourself to buy it at that point in time, because you’re worried that you’re going to behaviorally, you might panic or something at the time. This is a way to force yourself to buy.

Michael: Yeah. Ironically, the best time to sell puts was March and April of 2020. That was the time that you could because you were almost guaranteed to get the premium. The problem was I did that– [crosstalk]

Tobias: The shit about buying them. [chuckles]

Michael: That’s right. That’s exactly the problem. So, the best time to do it is actually the time you should just be getting on the stock, because I would have made a lot more money if I were to just turn on [crosstalk]

Tobias: That’s true.

Bill: I do like the idea of buying LEAPs here. Where you’re just like, all right, whatever I got two years. If something gets burned– the other alternative that Jason Buck said to me is, you buy out of the money front months puts all the time and you’re going to burn consistently whatever the number is that you want to burn, but when you hit, you’re going to hit it big and get cash is the only prom– [crosstalk]

Tobias: Spy. The spy hedging game that–

Bill: Yeah, I think like [crosstalk] into that. Is that the Spitznagel?

Tobias: Spitznagel has a paper. It used to sit on his site. It’s written by one of his analysts where he describes a strategy of rolling these ladders of puts, and he says that– and none of these strategies make sense without some long pairing, because something else, the idea is that hedging a book. But the payoff is– this is Chris Cole’s kind of– Not Chris Cole strategy, but Chris Cole’s overarching philosophy, and he uses the analogy of the worm rebounding. If you’ve got the worm in there rebounding and feeding it back to MJ who’s taking a whole lot of shots.

Jake: [crosstalk]

Tobias: Yeah. Rodman.

Bill: Oh, Dennis Rodman. Yeah.

Tobias: Rodman’s rebounding and giving it back to MJ, who’s scoring lots of points, but without Rodman getting as many rebounds as he does, you don’t say– in that scenario, call is rebounding, and he’s feeding it back to your long strategy to get longer at the right time, that adds some additional return to your profile, and it cuts off your drawdown. So, your return profile looks much better.

Bill: JT, what do you think of this thought? The reason I like this thought is, a lot of us worship Muffett.

Tobias: Muffet Bunger. [laughs] [laughs]

Bill: Yeah. The Buff Dawg and the Mung Machine. But the thing is, they were always doing that via float. They weren’t actually selling puts. It was a different mechanism. But ensuring that you have some cash in a true drawdown is something that’s intriguing to me, and the idea of cash drag gets less attractive, the longer I do this.

Tobias: Then, you don’t want to hold cash? Sorry, JT. JT was just about to say something funny. [laughs]

Jake: No. I don’t– You know me. I try not to overcomplicate it and get too cute and try to overoptimize. Instead, what I’m trying to optimize for is my own psychology, and just having the cash makes me more patient to be ready to make the moves, I’m not going to miss it, because I’m stuck in some put situation that I was trying to get at– squeeze out some extra premium along the way, and then I missed the really big, important move because I’m stuck there. Because you just never know what the market is going to offer up to you either, and when you’re going to want that liquidity.

Bill: If you’re long puts, what I’m saying is that, when that occurs, you’re bringing the cash in. That’s more the scenario that I was thinking of.

Jake: Yeah. I understand that tail risk insurance idea and feeding it back into. In theory, it sounds great.

Bill: Yeah.

VIX Call Options

Jake: Well, Toby, you and I have had a little bit of experience with a VIX strategy of call options there, which was the same idea, and basically, just bled premiums for months on end and–

Tobias: Yeah, years in my instance.

Jake: Then, there was no fire that gave us the pay day to make up for all that insurance that we bought. So, I don’t know. The longer than I’m in this, the more– I just want to try to keep it as simple as I can and make easier moves and take up the– reduce complexity.

Bill: Where were you guys buying VIX calls? North of what, 40?

Tobias: No. There’s a formula for it. It’s a standard deviation outside of where it’s trading, but it’s always complicated, because you got VIX at one level, and you’ve got the VIX futures at another level, and the options are at another level, because they’re options on the futures so it’s–

Jake: At one point you could get– This was when VIX was in single digits. It was insane. But you could get a $25– it’s not really dollars but–

Tobias: VIX.

Jake: Yeah, unit strike price for five cents.

Bill: Yeah.

Tobias: You just had incredible gearing on it. If it was to have a severe 2008 or even I guess 2020 style just meltdown, and VIX jumping to 80 or whatever, you were getting paid a lot.

Bill: Yeah.

Jake: I thought it was always structurally mispriced, because it has to be in a minimum of five cents for it, I think.

Tobias: Yeah.

Jake: So, there was a weird structural thing in that market where it just sold for five cents, but that wasn’t really a price that necessarily made more sense than something else. I don’t know. It didn’t feel stupid at the time. [laughs]

Bill: The tough thing about that strategy is you’ve got to be mentally comfortable with the bleed. You’ve got to be okay bleeding premium over and over and over and over and over again. Then, someday in theory, you should hit it out of the park. Then, you just have to know to sell in reverse at the right time.

Tobias: You need to be long enough on– The long side of your book needs to be giving you enough income for dividends or whatever that you don’t really notice that you’ve been in that premium all the time.

Bill: Yeah.

Insure Your Portfolio Like You Insure Your Life

Michael: How do you guys think about insurance for your life, forgetting your portfolio? Do you guys have disability insurance? Do you have life insurance? Would you consider yourself to be overinsured? My philosophy is the same in both. I’m just wondering if you have different philosophies in how you think about insurance for yourself and the family versus the portfolio.

Bill: Term life, cheapest shit I can get. But enough that when I die, my wife can bury me and be okay. I don’t have disability. No.

Jake: Already disabled.

Bill: Yeah, mentally for sure.


Michael: Can’t get it. Don’t qualify.

Jake: Preexisting condition.

Bill: [laughs]

Tobias: That’s time. We’ve made it.

Michael: All right. I got asked a question on Twitter that somebody wanted me to address it. I’ll get to Formula One. We’ll get to it next week. I’ll do it next week.

Tobias: Sounds good. Same crew next week. I think we’re going to foursome again. Thanks, fellas.

Bill: I think Mike gets relieved.

Jake: Lot of sword-fighting.

Michael: Yeah.

Tobias: [Laughs]

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