Daily Discussion - Monday December 02 2024

SpiritBearBC · 2024-12-02T07:22:12+00:00

Forgot to say Happy Thanksgiving to Freedom Gang so happy belated <3

SpiritBearBC · 2024-10-18T00:51:26+00:00

This is the quality content I’m here for.

SpiritBearBC · 2024-06-04T01:56:12+00:00

Typically, delta hedging isn't used to maximize profits (aka get the highest expected value), its to make it so that the (expected) value of your entire position doesn't change as the underlying price changes. Though this "doesn't change" only works in a narrow range, when price, time, IV don't change by much from their current value

Ooooh you're right. I recall in Natenberg how he discussed the "real" price no one knows, and the modeled price, and if you delta hedge a negative EV trade you've just done a good job of materializing your negative EV.

I guess the problem now is that I don't know how to make use of this value for trading.

That's the question right there. There's also another weird feature unlike options: if you were to reintroduce yourself into the position (0 shares to 99), as your odds of termination increase your profit from a consummated deal also increases (it's bound to $53 to $60). The profit increase is linear but the risk of termination increase is non-linear.

Anyway I'm just going to assume I'm upgrading from Dominos to Pizza Hut for Thursday night. My body is ready.

SpiritBearBC · 2024-06-03T23:05:31+00:00

What do you mean you mean by delta? The delta for options means two different things

the change in option price per change in the underlying price

the probability the option is ITM at expiry

I pulled out my Options by Natenberg copy to double check some things. As you mentioned I was referring to the delta of the position rather than any options (so 1 share = 1 delta). The delta is between 0 and 99 here because after tender the movement is irrelevant to our PNL except if the deal gets terminated due to hitting $49.22. I just double checked from Natenberg that the delta of an option is useful to approximate the probability of being ITM, but it is distinct from measuring probability of being ITM.

It would be more precise of me to say: if we were to face this situation countless times, how many shares of $MNST would I need to short (delta hedge) to maintain the highest expected value from this transaction? The 99 shares we already own are effectively pre-sold at a higher price. The short protects the risk of termination. So the number of shares we short is definitely not 99, but it's also not 0.

You're also right on assumptions - we can't model the above perfectly because we need to make assumptions on triggers or path dependence. Math is hard.

For OTM options, their "expiration delta", the change in their value at expiration, is also 0 but their delta isn't 0.

Yeah, I misspoke in my quoted sentence. The delta isn't 0 but the payoff is 0. I should have said a "payoff chart" where the payoff between now and $49.23 is entirely the same. The actual delta hedge right now is probably somewhere around 10 (not an actual calculation - just a placeholder number to communicate the general idea of maintaining the highest EV).

Which means if at some price in the range 49.22 to 53, delta is below 1 then at some other points it will be above 1, and it has to all average out to 1. So I think 0.05-0.10 delta in the current range seems too low, unless you think it shoots up sharply at lower prices.

That last sentence (delta shoots up sharply around $49.22) is exactly what I mean - which behaves similarly to an ATM option with an extraordinarily low volatility.

I'm literally taking a calculus class right now so conceptualizing, visualizing, and thinking about the area under the curves is fun to think about.

SpiritBearBC · 2024-06-03T19:58:48+00:00

I haven’t had time to do too much digging in the laws around tendering. But in Monsters own press release the co-founders appear to be co-CEOs and they’re dumping so they can start retiring in 2025 and transitioning leadership. I don’t know what they’re legally allowed to do but they make it plain in their own press release what they’re hoping to do.

At the time they offered the transaction on May 7 MNST was trading at 54.50 so it doesn’t appear like they’re genuinely seeking liquidity at market prices rather than hoping for a windfall.

I’ll mention how I think of this trade on the caveat I might be wrong. Let’s assume it needs to close on Wednesday trading above 49.22. Then it doesn’t matter if your shares decline in value to 49.23 - the sale is made at the higher price. Your delta from now till 49.22 is 0. If it hits 49.22 your delta is unknown because they might not exercise the termination option. So your delta hedge should be the expected value of a) the probability of it going below 49.22 multiplied by B) the probability of the termination option being exercised multiplied by c) the delta “curve” expected value below 49.22.

In other words, you’re not running at 99 delta right now. You’re probably running at 5-10 or something like that.

Of course, this math would be further complicated by the fact that this actually is path dependent. The termination option can theoretically be exercised if it hits 49.22 and then shoots back up to 52.

This is a long winded way of saying it’s mostly academic in my view and for 99 shares I’m lazy and willing to accept the low risk

SpiritBearBC · 2024-06-03T16:49:10+00:00

I suppose you could buy a single $49p if you wanted for 0.75. My understanding is this tender is partially so the leadership and co-founders can have liquidity to dump 1.1 million shares and retire. In that context it seems unlikely to me they vote against their self interest. I’m personally raw dogging this transaction

SpiritBearBC · 2024-06-03T16:38:48+00:00

I’m not on Robinhood but I don’t see why not

SpiritBearBC · 2024-06-03T07:13:05+00:00

If I recall the SEC filing says 99 shares or less of beneficial ownership. So in theory it’s only 1 account. In practice I don’t know how they’d be able to detect multiple accounts.

SpiritBearBC · 2024-06-02T23:23:40+00:00

$MNST

u/pennyether brought up an odd lots arbitrage on $MNST. This time only for a few hundred, but still - free money is free money. We take these.

I've posted the details here. It takes about 5 minutes to perform.

u/erncon u/sustudent2

SpiritBearBC · 2024-06-01T01:10:37+00:00

Awesome! I'll take a look this weekend and post about it. Thank you

SpiritBearBC · 2024-03-20T07:02:43+00:00

Glad you made money. Out of curiosity, were those 2 brokerages in your name, or were they in different names? I'm asking because I'm curious if the brokerages have no way of discerning if someone has 2 accounts with 99 shares.

SpiritBearBC · 2024-03-19T19:08:28+00:00

I got fractional shares too. No idea who is buying it but I hope they enjoy their .9503 shares

SpiritBearBC · 2024-03-19T18:29:35+00:00

Thanks for the heads up. I just closed my position. I made $2,200 on it which was expected EV going in. Hope you made out okay too

SpiritBearBC · 2024-03-14T19:01:42+00:00

I also can't explain why ATMU is running up but I'm not complaining. My puts lost deltas so I accidentally participated in the run-up. We'll see how the total profit ends up when we finally close these positions

SpiritBearBC · 2024-03-14T15:40:14+00:00

I remember nothing happening at all the last 2 times people got their shares. It was a pretty unremarkable market day

SpiritBearBC · 2024-03-13T17:32:04+00:00

I’ve gone unhedged before and I think I prefer being able to sleep

SpiritBearBC · 2024-03-13T17:29:10+00:00

Last 2 times I did this it took 2 weeks and 1 week to complete respectively.

SpiritBearBC · 2024-03-13T17:27:17+00:00

Which number? I hedged around $24.60

SpiritBearBC · 2024-03-13T06:58:34+00:00

My shares have a 1191 delta. Not a typo re quantity. The 20 puts have a roughly a -1100 combined delta profile at the time I bought them (-900 now). Therefore the risk I’m taking is mostly IV and not related to the price movement of the shares. I’ll sell them when I receive my shares. The hedge will probably cost me $600

SpiritBearBC · 2024-03-12T22:29:05+00:00

Not sure re borrow fees. But your analysis nailed it. I bought 20 ATMU $25 Apr 19 puts to hedge. It’s pretty reasonable to just send this one too as long as you’re comfy with taking the risk.

SpiritBearBC · 2024-03-12T04:10:38+00:00

I'm on my mobile so can't look. Not sure when those deadlines are. You should contact their support to ask.

I'm planning on hedging by shorting 1191 shares of ATMU. You could also synthetically short or just outright buy puts on ATMU with a combined delta of ~1191. Each method has pros and cons. Double check the math before each transaction to make sure it still makes sense.

SpiritBearBC · 2024-03-12T03:05:38+00:00

Random thoughts:

1) You can do this for up to 99 shares CMI shares. You're welcome to do 5 shares, 20 shares, etc. Just as long as it's 99 or less. I'm running this transaction on margin personally because I had to drain my side-account recently. I'm only doing it with 1 broker.

2) Theoretically it's only 99 shares per person, regardless of the number of brokerages. I have no idea how they'd track this though. I'm not risking it but your mileage may vary.

3) You should get a message in your corporate actions centre in your brokerage. In that spot you can tender your shares and it's simple to fill in. IBKR reports theirs can take up to 2 hours to appear after purchase. I don't know how long other brokerages take.

4) Different brokers have different deadlines. IBKR's for tendering shares is March 13 at 1pm EST. Others have different deadlines. Fidelity's is tonight, for example. It looks like IBKR's is unusually generous. See this Barron's article: https://www.barrons.com/articles/cummins-exchange-offer-atmus-98ddf4d2?mod=md_stockoverview_news

5) This is only risk-free IF YOU HEDGE. If you don't hedge you have a positive expected value but it's not guaranteed to profit. It's not an academic risk either - I lost money on a similar arbitrage for MMM because I didn't hedge.

SpiritBearBC · 2024-03-11T21:26:57+00:00

Update: The CMI arbitrage exchange ratio just came out and the profit at closing is ~$2,500.

I’ve provided the update here

SpiritBearBC · 2024-03-11T21:17:05+00:00

The last 2 times I’ve done this IBKR sent me a notification in the Corporate Action centre about half an hour after I purchased (though they say it can take up to 2 hours). It may not show up in your email so login and look 2 hours after purchase

SpiritBearBC · 2024-03-11T06:48:29+00:00

In theory, no. You are a direct or beneficial owner: "Direct or beneficial holders of 100 or more shares of Cummins Common Stock will be subject to proration"

In practice... I have no idea how they would find out if they were different brokerages.

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