Ares Trading

All positions have been closed for September.  There were 5 positions, average holding period of 3 days, and only 1 position with a loss.  The total return for September was 32%, resulting in $940 realized profit off an initial investment of $2,940. The following summarizes the trades for September.

IWM: This is the Russell 2000 Index ETF. Puts were bought and sold in a single day turnover for a profit.  This strategy was used twice to make 45% and 30% returns.  The timing was crucial and profits were taken quickly.  In the current calamity facing the financial markets, shorting indicies is a simple profitable strategy.

IRF and VSH: Interlink (IRF) and Vishay (VSH) were traded in a MnA arbritrage strategy. As discussed in the previous post, VSH had initiated a hostile bid direct to shareholders for IRF at a significant premium.  The strategy was to go long IRF (buying calls) and short VSH (buying puts).  Unfortuneatly IRF urged shareholders not to accept the deal and the bid is still on the table.  Thus IRF declined and the calls lost a significant amount of value.  On the flip side, VSH lost a significant amount since the puts were purchased on 9/11.  They stock price slid about 18% from 9/11 to 9/19 and resulted in a 200% return on the puts.

WFMI: Due to declining discretionary consumer funds and other technical indicators WFMI was trending down. Puts were bought on 9/12 very close to the money.  Within a day the puts were ITM (In The Money).  This position was up 20% but it wasn’t closed.  On 9/15, WFMI started trending up after a high volume gap up in early trading.  The puts were immediately sold and the position closed for a 15% gain.

Ares Trading is satisfied with September’s performance.  The target ROI  was 30% and the goal was attained.  In addition, positions which were losing value fast were stopped adequately.  For the coming month of October the target ROI is going to remain 30%.  Ares Trading will focus largely on index ETFs (DIA, SPY, IWM, QQQQ, XLF, XLE, DBC) and also try to exploit the credit crisis which is sinking the financial sector.

The American and global financial markets are currently very volatile. The financial firms are still in the process of writing down their illiquid securities and the market sentiment is strongly bearish due to high oil prices, inflation, and a much lower dollar.  Any negative news, such as rising oil costs, or a sector leader missing their earnings can cause a quick intra-day sell-off. Ares Trading cannot speculate in the current market state, rather there are larger macro issues which can be used for proper investment.

Financials have been hit hard, which can be seen by the Sector ETF: XLF performance in the last month. However, many firms have been hit harder than others due to the overall bearish sentiment for the financial sector. These firms face an upside risk. Research is being conducted on which Financial firms are currently drastically undervalued and have the potential to return to normal multiples.

An example of this was the quick trade made on LEH (Lehman Bros). Naked calls were purchased the day the share price hit $12.80 (18% decline in one day). Rumors were out that Dick Fuld, CEO, would take the firm private if the firm wasn’t valued higher. Sure enough, Lehman hit its support and had an upside momentum since. A quick 26% return within 6 days.

Other bets didn’t fare as well, i.e. SSL and PRGS calls. PRGS (Progress Software) was an earnings play which didn’t work out because although the company did beat consensus, they lowered their guidance. This sent the stock price into a strong downward movement. The calls should have had been sold by STOP-LOSS before they lost over 90% of their value. SSL (Sasol Ltd.), the South African integrated Oil and Gas company was simply a wrong pick in the short term. Although the company has strong fundamentals, it has been a victim in the recent sell-off. In the future there has to be more discipline and losses have to be cut at 30%.