On Taking Vacations…
August 20, 2020
An ED Trade From The Road…
September 14, 2020

PG&E Redux…

I’m on vacation, but how could I escape the news that California is burning? While PG&E (PCG – USA) has yet to be blamed for these fires, as I sit here in the North Carolina mountains, it sure seems silly to tempt fate. Yeah, I know, I’m the fool for expecting an Event-Driven (ED) situation to work into the teeth of California’s fire season. That’s my own fault and after scaling back my exposure, I’m prepared to call this one a mistake. In any case, publicly getting one wrong ought to be illustrative of how ED trading is supposed to work.

Despite taking a mulligan on this one, I still came out well ahead financially. I lost a few dimes on my common, roughly offset by the few dimes I made on some covered calls (remember how high IV was??). Let’s call that position a wash. Meanwhile, the August puts that I wrote went out worthless for a good-sized win (I booked mine a few days before expiry). I still have some Septembers decaying away, because nothing has changed about the thesis itself, though the position is now much smaller as the perceived risk has increased. Overall, it was a profitable trade—despite the state burning up, with negative implications for PCG.

You cannot win them all. In fact, you’re likely to get a good chunk of your ED positions wrong. The key is that you rarely lose much when you lose—yet you bank nicely when you win. Often, due to the fund-flow mechanics, you actually make some money on the mistakes as well.

As the number of active managers declines and more of the financial system’s fund-flows are dictated by passive management mandates, the predictability of these Event-Driven opportunities will continue to increase. For those of us in active management, this will become a veritable gold mine. A lot of my friends complain bitterly about passive taking over the markets. To them, I have only one thing to say.

When the rules of the game change, you need to change. If you aren’t front-running these index funds that need to buy or sell some massive percentage of a company’s float, you’re not thinking creatively. You can sob about how cheap your value stocks are, or you can evolve. Event-Driven trading wins, even when it loses. The fund-flow tailwinds are just that powerful currently—especially as prop desks cannot provide liquidity like they used to. I’m going to be writing a lot more about this topic. You can be a sucker and wish the world went back to 2002, or you can make a whole lot of money. I prefer the latter.

California is burning and America’s most hated company hasn’t even traded down on the news—that’s how powerful these fund-flows are. We’re entering a golden age for Event-Driven trading. Who’s ready?

Disclosure: Funds that I control are short PCG puts.

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