rookiepilot wrote: ↑Wed Nov 14, 2018 6:23 am
I'd like the Bombardier defenders to show up, please.
I'm one of those who have in the past commented on how pleased I was with some BBD.B holdings at the time. It's very possible those comments were taken out of context and interpreted as some form of defense for the company as a whole. I will be the first to admit, not a financial expert by any means, but one of my hobbies is trading in the risk markets, it can be a lucrative hobby at times. The rise and fall of BBD.B is a wonderful opportunity for a learning experience, so, I'll explain my strategies and philosophy behind the BBD.B trade, let the expert critique and possibly help me learn how to better manage a risk capital position.
First, the philosophy. I do not believe that deploying risk capital to the markets is an investment in any way shape or form. The short and medium term prices of stock issues are driven primarily by the news cycle, and less so by company financial pictures. A disciplined trader enters a risk position with a set of pre-determined parameters, how much will we risk, what is the potential for gain, and what is the timeframe for execution? If a position is established without these parameters defined in advance, it's just gambling. With well defined parameters, the process is about balancing expected gain against actual risk. I came about this philosophy a long time ago, back in the bad old days of the tech bubble I was one of those folks that was glued to the tape every morning, actively trading in issues being driven by the news of the day, it's a high stress lifestyle that can be somewhat rewarding, but one thing always bugged me, those who had the stock before the news broke would make out like bandits without the stress of chasing intraday moves. My problem at the time, capital base was not large enough to sit on stocks hoping for news to break, and I would likely be stuck on the wrong side of the news story as often as not, it just seemed like a risky strategy. Over time, the capital base grew, and I learned how to filter stories in the pipeline a little better.
When I originally established the first trade in BBD.B, I had a very clear outline of the risk and reward, along with the timeframe. The news cycle at that point was all about potential for index removal with the stock trading under a dollar. BBD.B was not even on my radar in those days, not an issue I had any interest in, huge float that rarely makes large moves. But the potential for index removal brought headlines and a wild card into play, it was my opinion that company management would not let that happen, there were to many things on the go that had potential to generate a good news story, CSeries being the biggest of those. It would only take one good CSeries press release to run the stock safely back up above a dollar and quash talk of index removal. My initial entry was then well defined, purchase under 90 cents, an expected sell point over a dollar within a 3 month timeframe. That adds up to a return of 11% or more over the 3 months till index removal went from talk to reality. It was my opinion, the risk of continued slide without a recovery back into the range over a dollar was minimal, just to much potential for the management to spin a story around the CSeries. I pulled the trigger, took on a bunch of shares, then immediately placed a Good Till cancel for a sale at 1.01. Gosh, it only took a couple of days, woke up to find my order had filled at open well above my target price of 1.01. Nice, and now BBD.B was on my radar. The thing that really surprised me, just how peppy the bid side support got in that first run up after it sank. I think it was about a week later, there was BBD.B sinking down to a dollar again, hmm, can we pull this off twice? I left a buy at 0.99, good till cancel, it filled the next day and closed above a buck.
Ok, so now I have a good chunk of BBD.B, we've made 20 cents on the first round of a dollar stock, how far can this thing run, the first spike was not driven by a fabulous story from CSeries, it was essentially just market noise. Going to play it different now, have some cushion, time for a slightly different strategy. Set in a stop loss at 0.97 so we dont get hammered to bad if it continues to sink, no upside protection, the goal is to sell the news when that CSeries story does come. Yes, it took some time, if memory serves correctly, was 2 or 3 months, but eventually that CSeries story came, woke up to find BBD.B going way up, better than 50% on my monry, so onto the sell side we go. I remember clearly that day, was in a PM with somebody here about trading in BBD.B based on the CSeries story, he was a buyer at the open, I was a seller. We chuckled, he probably bought my shares. There is a regular reader here who can validate the story, but I wont mention any names, that would be rude, not sure he wants to own up to buying a short term top and selling for a small loss.
The thing about it now, BBD.B has been on my radar for some time, I've become quite familiar with the Level 2 games played on that issue, and I'm really not sure how far the market can run this stock on CSeries stories, but it's obvious that anything good in the press about that story will bring buyers out of the woodwork, in droves, and at the same time, all of the offers seem to vanish. How many times can this thing run ? I dunno, but, it still appears to have serious life left in it. Next day it's settling, so, lets try round 3. I have a standard size measured in dollars for entry into a risk position, so, place an order one more time, but now we are dealing with a smaller number of shares, back to a standard entry position. Some would say I am playing with house money because I can buy almost all of those shares with BBD.B profits over the last few months. I disagree with that philosophy, when I place an order to buy risk shares, it's my money going on the table. I like round numbers, an issue on the decline almost always takes out the round numbers and sinks a little lower. Sold the day before at the open up around 1.75, it's headed for 1.60, place the order at 1.49 and wait. Well, it never got that low, so as the close approaches, just say fuggit and hit the offer, then set in the sell at 2.01 and wait. I dunno, it was a week, maybe it was 2 weeks, but that order filled when I was not around. Do I like BBD.B as an issue to trade, yes, I sure do. But, this horse has been rode hard and put away wet, so lets just move on. But, do set some alarms, if it goes back to 1.75 re-evaluate. some time later, coulda been a couple months or so, alarms did hit, but I didn't buy, just watched. Sure enough, within a short time after hitting my 1.75 downside alert, bugger was trading north of 2 again, and I missed the boat completely. Reset the alarms. Alarms hit again a couple months later, but this time I was ready, the buy at 1.74 was in place before the price got there.
But this is where I once again changed up the strategy, based on how the market has been reacting to this particular issue. Any time CSeries stuff hits the press, it just goes up and up. and between it seems to trade fairly stagnant, with small declines. I didn't buy a risk position on this go around, I bought what I consider a core position, a much larger chunk of capital. I dont treat core positions lightly, and I do tend to limit risk on those large capital chunks. I've got an engineering education, part of that is how to do advanced math, I can twiddle the numbers in the black scholes model as well as anybody and BBD.B has options. To limit downside, I bought enough puts a few months out to ensure a big slide would not wipe out that capital. Puts can get expensive, but a big chunk of that expense can be offset by selling calls. You pay the time premium on the puts, collect it on the calls, only out of pocket for transaction costs. From there, really no need to even watch it anymore. it's bracketed on both the upside, and the downside. There is a defined minimum loss at the strike of the puts, and a defined maximum profit at the strike on the calls, and everything in between is just noise. Still waiting on the big story out of the CSeries program, and with a little luck, it'll hit the strike on my calls which will force liquidation. Didn't happen, it basically traded sideways and the options expiry arrived. Price was somewhat higher at the time, so, reset the hedge, this time buying puts up a little higher, and selling calls up a little higher. At that point I was sitting on stock purchased sub 2 dollars, had puts at 2 dollars and sold calls at 4 dollars. Hindsight is always 20/20, shoulda sold the calls at a 5 dollar strike, but, I didn't, the math didn't work for that at the time.
The stock did eventually take out the calls, at which point there is no reason to continue the trade, there is no upside profit when you have calls outstanding to sell at a fixed price. I was not the only one unwinding at that point, there was a truckload of 4 dollar calls outstanding when that day came. As for once again re-evaluating the trade, no point. This was a play based entirely on news potential from the CSeries program, and by then, CSeries was an Airbus story. No story left to wager on.
Now for the recent downslide, HOLY COW, did I ever miss the boat on that one. Maybe I should have paid a little more attention to the commentary from rookie. When it went over 5 bucks, that opens the floodgates for retail accounts to establish short positions, and in hindsight, the runup to 5 was way overdone considering any fundamentals. I consider naked options to be truely gambling in the purest form, but wowow, a really smart cookie woulda loaded up on 5 dollar puts last July, again, easy to say in hindsight, not so easy to pull the trigger at the time. But not everybody is taking a bath as BBD.B slides down, check this out:-
https://web.tmxmoney.com/options.php?qm ... page=88100
There's a whole lot of options in play, lots of hedges that have sold the calls at 5 bucks and bought the 3.50 puts. The underlying issue may be taking a nose dive, but, millions of shares are insured at the 3.50 sell price, half that amount at 4.00 and another big chunk at 3.25. Yes, they are probably taking a small haircut on BBD.B pricing today, but its not the catastrophe looming over those holding shares with naked market exposure.
So rookie, now that you understand, my commentary was in no way any kind of defense of Bombardier as a company, simply commentary on how the market moves, what say you ? What exactly was wrong with a risk strategy based on expectation of news out of the CSeries program ? What would a financial expert have done to improve execution while managing risk thru the process ?
