Jan 2024 Portfolio Update

Portfolio Return: 1.37%

Straits Times Index Fund: -2.48%
S&P 500: +4.2%
Hong Kong Index Fund: -4.8% (sigh)

Current XIRR: 13.27%

Option selling income is not reflected in the investment returns.

Transactions:

Best Mart 360, another somewhat illiquid stock. It has ROIC on the high teens, increasing topline, and a substantial amount of owner-operator ownership.

Given all these years suffering under debt worries, investing in Best Mart is a easy decision: it has 255m of cash, 77m of debt, and 1.8b market cap, which means you are actually paying for 1.7b net. Dividends have been consistently rising and now that a corporate is the major shareholder, it should stay steady. If it continues to earn a free cash flow of 130m, the multiple that you paying for this business is not high.

Much of my attention had been used on my option selling portfolio instead. A mind-boggling 19 transactions was made in this month alone. Underlying companies/funds involved are:
1) Tracker Fund (Tracker)
2) Tencent
3) Link Reit
4) Anta Sports
5) Hong Kong Stock Exchange (HKex)

I have sold ('write') call options on my Tracker positions and given how badly the market is dropping, this trade is safely out of the money. Selling options contracts on the Tracker fund is not a great idea. Implied volatility and liquidity is on the low side. Nevertheless, given the size of my Tracker holdings in relative to my income portfolio, it has generated more than half the amount of premiums this month.

Calls sold that are already deeply profitable are bought-to-close for a few reasons:
a) It has very little theta left-- most of the money had already been made
b) I couldn't sell another call until the current ones are closed. Selling calls when you do not have the underlying is what they call a 'naked' call. It is still possible that the market could surge upwards in the remaining days and you will be force to buy them back at a high price.

Sold puts on Anta Sport, Tencent, and HKex were deeply in the money due to market volatility. The recovery later half this week brought most of them out of the money, which was a pleasant surprise.

So generally, the strategy is

1) Sell Puts for these 'good' companies
2) If I have stock on these companies as well, sell calls if I do not think they are priced cheaply.

This strategy is called "covered-call strangle."

***

(Sell Puts to accumulate stocks) --- Owns Underlying stocks --- (Sell Calls)

If the market turns down, puts are exercised and I own more stock. At some point of time, I would have to stop selling puts.
If the market goes down exceedingly hard, I would be stuck with these stocks and hence it is important to sell puts on only stocks that are good companies (high ROICs).
If the market goes up, there is a good chance my portfolio would be profitable.

***

IMO, the reason why selling calls will make sense is because the market pricing of these good companies are not in bargain bin territory.

Example:

The risk free rate which I have is 3.7-8% on T-Bills. Compared this to a company like HKex, which is yielding about 4.1% (13b free cash flow/310b market cap), the 'risk premium' is 0.4%. If, let say HKex is priced at a yield of 6%-7%, and that the earnings easily grow due to its business  nature, it will make more sense to own stock than a risk-free bond. 

For HKex to yield 6%, earnings has to surge, or the stock has to be sell down. At 240 HKD a share, you need it to be (13b/ x = 0.06, then x is 216) to fall to 216 HKD in order for this purchase to make sense.

Of these companies mentioned, I think Anta Sports has the most favorable pricing, and hence I am quite happy to sell puts on them. It helps that Anta's option pricing has a way higher Implied Volatility, so the premiums are richer.

On an NAV of about 50000 SGD, this strategy yields about 1000 monthly. You need money to make money, and I am not being very aggressive. If I could make 12000 annually on a portfolio of 50000, that would be a yield of 24%, which is attractive. A directional strategy (betting on market directions by buying calls or puts) will beat an option selling strategy WHEN the market is directional. However, I already have positions to capture that area.

Hopefully the market be merciful in the coming days. It has been piss-poor for quite long!