I have been writing covered calls and cash-collateralized puts lately. You don’t get rich quickly by doing that, but if you stick to it, you can consistently grind out singles and doubles and the occasional triple. Do it in a tax-deferred account, because everything is short-term cap gain. Stick to ETFs instead of individual stocks, because ETFs don’t go bankrupt. Size your bets so that any likely loss will not wipe you out. Choose options whose IV is great enough to allow you to recoup any likely loss in ten months. Avoid ETFs with crazy underliers, like Crypto. It only takes half an hour a week or so, and you do not have to stay glued to the screen during trading hours.[1]
Wise words, I know. But I recently made a trade that put me in the running for Mook Of The Year.
On May 5, I sold four June 10 TQQQ 34 puts for a net credit of $4.05 per contract. TQQQ closed at 35.86 that day.
TQQQ fell. On May 10, it hit a low of 30.28 and I panicked. To stem the loss, I bought four June 10 TQQQ 30 puts at 3.81 per contract. The thinking was that, if I changed the naked put to a vertical spread, I could limit the loss if the bottom fell out. But I didn’t really limit the loss. The naked position had a net credit of $1,620, with a total of $11,980 at risk. The vertical spread had a net credit of $96, with a total of $1,504 at risk. TQQQ would have to fall to $26.19, I believe, for me to lose more on the naked position than I risked on the spread. And the ratio of potential gain to potential loss was much better on the naked position than on the spread.
TQQQ fell below $26.19 on May 20 and May 24, but it closed above it on both days. It is now trading at $32.53. I bought my covering position at a premium because I panicked.
I am a mook.
The thing to remember about trading cash collateralized puts is that the market is cyclical. Trends happen, but prices generally revert to the mean. And if you get assigned, that is not the end of the world, because you can rent out your shares by writing covered calls against them. It is a grind, but so long as you do not over-size your bets, you should be able to recoup the loss of assignment.
The manufactured housing market is due for a correction. Rising interest rates will do some damage. The low-hanging fruit – the mom-and-pops with public water and sewer, fifty to a hundred lots, all tenant-owned homes and 10-caps – are gone. Prices have been bid up by PE funds with access to cheap funds and individual investors like me. Regulatory risk threatens the industry in states like New York, California, Oregon and Colorado. Prices have been frothy for a while. They are due to peak.
Does that mean that park owners should bail? Prices should recover eventually. Whether you should sell now depends on how old you are and how lazy you are.
By way of background, here is how ETFs and mobile home parks differ:
- Mobile home parks take work. If a stock position goes against you, you curse your fate and look for ways to lessen the bleeding, but you don’t have to deal with Orangeburg pipe and chase Tin Hat Guy for lot rent;
- Mobile home parks are lumpy. You can shed half an ETF position. You cannot sell half a park; and,
- Real estate transactions are slow and transaction costs are high. You can turn a stock position into cash for less than a dollar and the click of a mouse. Not true of the sale of a park.
So – if the market might be in the dumps for the next five to fourteen years and you are seventy-two or older, sell. You probably won’t make it to the next up-turn, and if you live that long, you won’t enjoy climbing under mobile homes and arguing with Tin Hat Guy when you are ninety-one. But if you are younger or a glutton for punishment, hold on. Things snap back. Don’t be a mook.
Short-term mean reversion aside, I believe that parks are subject to certain longer-term trends. In this regard, they resemble ETNs that reference the VIX index, such as VXX and UVXY. These instruments trend but spike. They trend because of contango; each of these instruments is an entity that, at any given time, holds a bunch of cash and positions in the two front-month VIX futures contracts. As the nearest contract goes off the boards, the entity rolls its position by entering into the next second-from-front month contract. Since VIX futures contracts decay over time, this means that the entity’s positions are constantly leaking value. They spike because the VIX is, among other things, a measure of short-term fear; when equities get whacked, the VIX spikes. When investors get comfortable, it falls. These spikes are, generally, short-lived. The result is a chart that looks like this:
Even though mobile home prices revert to the mean, they are subject to certain long-term trends. The two biggest long-term risks facing mobile home park investors now are regulatory risk and climate change. I do not like the prospect of greater regulation, but I suspect that, in some form, it is here to stay. We can fight against it, but our best bet might be to engage with regulators to make sure that people who know how to run mobile home parks – that is, park owners – help craft laws that regulate same. Climate change is the wild card. Most park investors do not address it because, well, they do not swing that way politically and because they hope to bail before it becomes a problem. But it is a problem. In thirty years, much Florida will not be underwater, temperatures in the Southwest will not have surpassed the wet bulb threshold on most days, and the West and Mountain West will not be entirely uninhabitable because of wildfires and drought yet – but people will have recognized that those risks are real and emergent, and baked them into real estate values. Once that happens, sauve qui peut! My money is on parks in the Northeast and the northern Midwest inland from the sea, where the temperature will be hot but bearable, the ocean will not be up to your armpits, a supply of fresh water will be available, and Tin Hat Guy will be long dead. With a park like that, you will be able to relax and spend your dotage writing derivatives on arrowheads, cowrie shells and menhirs.
[1] Dirtlease.com is not an investment adviser. All information contained herein is for educational purposes only. Readers should consult their own advisers before making an investment decision. Options trading involves the risk of loss. Past performance does not guarantee future results.