Trades from 2020-07-16

I sold January 2021 FSLY put at 55

I'm bullish FSLY. Right now, I'm net long with a covered call expiring in January 2020 at 90. Both of these options sold for about 10. Though I think it is likely to be very volatile. I sell puts at prices where I will be happy if they get hit. (I sell calls hoping I'll be a penny above the expiration price.)

I've thought about increasing my position several times. I've thought about reducing it a few times. The symbol is very volatile. I'm willing to take a profit if it bounces around or keeps rising. I'm willing to extend my position at an effective price of 45.

I wrote a little bit about my thoughts on FSLY yesterday, I think. Quick summary is I really like its revenue growth, but I'm less fond of its expense growth. I'm net bullish, but I expect it to be pretty volatile with a low Sharpe until it starts sustaining profitability. I see some risk to the business being made obsolete before it achieves profitability but some potential that it continues to provide a valuable service indefinitely and positions itself with a strong moat. Overall I think this set of views is better expressed by selling options than by adding to a net long position.

I liquidated my TTD position and sold a June 17, 2022 put at 400.

This is another stock I'm long term bullish on, but I expect to be very volatile and trade well below its current price again. I would guess that 2 years from now TTD will be trading somewhere between 300 and 400. I think that's more likely than it going up much further from here in the short term and also more likely than it going down much below 300 again. TTD is profitable with strong revenue growth. I think there is practically no chance of it going out of business in the next two years. I think there's a much bigger chance that I live to regret liquidating my current position than selling the put, but ultimately, the long term volatility in this symbol is really expensive. I wish I'd purchased a round lot of it to begin with in which case I would have sold a covered call rather than liquidating, but I was still trying to have far more diffuse holdings at that point, and I was unwilling to put more than about $5k into any particular symbol at that time. My willingness to allocate money to symbols has increased as my biggest holdings have grown organically. TTD is currently trading at about my current limit for willingness to allocate capital to a symbol if I were to purchase a round lot, but I think of myself somewhat as having allocated capital to the put conditioned on it being exercised, and I'm still not willing to allocate $60k to a symbol which is what I would be doing if I was selling a covered call and a naked put while also holding 100 shares of the stock.

I know most economists would tell me that I'm irrational to put path dependence of how I entered into my positions into which positions I'm willing to hold. I vehemently disagree. The thing that this model gets correct is that it does appropriately bias people back towards being flat any given symbol, but I think it gets a lot wrong as well.

I sold the odd lot portion of my stake in BILI

BILI is in a similar boat to FSLY, only more so. It's revenues are soaring, growing at more than 80% a year. Its price/revenue is incredibly low relative to its revenue growth. Unfortunately, it's earnings are extremely negative and it's burning through 30% of its book value per year, and many of its costs are growing faster than its earnings. Technically, its cost of revenue has decreased in its last full year of operations, but its other expenses have increased by as much as 150%. I sold covered calls against this position a little while ago that will be expiring on Monday.  They are slightly out of the money, and I don't expect them to be hit. Either they will be hit, or I'll liquidate Monday.

Unlike most of my other liquidations, I don't plan to sell a put against BILI in the near future. I think it has a much higher likelihood of going defunct or needing to raise significantly more capital than either FSLY or TTD. Given its aggressive increases in spending in SG&A and R&D, I'm not fully convinced that those expenses aren't what's driving the revenue increases, and I don't know whether that revenue goes away if these expenses stop. I trust those line items as distinct form cost of revenue at lot more when they're growing less aggressively.

In short, BILI has a beautiful top half of its earnings statement with a really ugly bottom half. It looks like there's a lot of promise, but it also looks like BILI will have to raise capital from investors again if it's going to deliver on that promise. The price at which it does that and the amount its able to raise are completely up in the air, but I'm guessing that that happens at less than its current price.

(Incidentally, I'm looking at analyst forecasts for EPS for this year rather than last year's spending. That's the big difference for me between BILI and FSLY. BILI's negative earnings are still increasing dramatically this year; whereas, FSLY's seem appear to be significantly contracting. Analysts expect both companies to be profitable in 2022. However, while I don't have data to justify this, I view one year forecasts as way more predictive than 3 year, in part because that's built into the structure of how time works. In part because companies tend to give way more guidance related to their own expectations in the current year than they do for future years.)

I entered a long position in Viacom CBS.

I think Viacom CBS is ludicrously undervalued. I talked about it a bit yesterday. I hadn't yet taken a position in it at the time of writing that since I still hadn't decided what all I was willing to liquidate to free up funds for that position. I made those decisions today and entered into that position.

The quick version of the long thesis is that Viacom has a very low P/E. There are a couple things that make it look less like its growing revenue at the moment than are really true because it televised the Super Bowl and March Madness last year, and didn't televise those this year. But it looks to me like it is still growing revenue over the long term. Many of its shows are highly rated at the moment. Much like Disney, I see it as a beneficiary of streaming, not a victim.