The Russia/Ukraine spat has definitely heated up with Russia formally recognizing the two provinces in Eastern Ukraine that it already had informal control over. Obviously things are fluid and can always devolve further, but markets seems to be pricing in a decent amount of this risk currently. Energy and commodities seem like the biggest beneficiary of the upheaval. This uncertainty has caused volatility to increase on the indices once again with the Volatility Index (VIX) once again going over 30. In my career, I can’t recall a time when options were so much more attractive than owning most stocks, given the risk/reward characteristics.
I thought it might be helpful to give an example of a trade we did to today to take advantage of the volatility. Camping World Holdings (CWH) is the leader in selling campers and RVs. They also sell parts and services, which tend to generate recurring revenues. Earnings have hit a record in the last year, equating to $6.88 per share. Management is very optimistic on the near-term as demand has exceeded supply. The stock trades at around $29.80, so 4.33 trailing twelve month earnings. Management just increased annual dividend to $2.50 per share, so the current dividend yield is 8.4%. Earnings are likely peaking or close to a peak in a cyclical industry, so I wouldn’t want to pay an extremely high multiple for this stock. However, the selloff from the highs of $48.50 seems a bit much. I like the stock, but I like the options far more.
Today, we were able to sell January 23 $19.09 put options for $2.1. This is a 12.36% return in less than year. The stock could drop by roughly 43% before you would be at your breakeven level at expiration. The dividend yield at the $16.99 breakeven would be 14.7%. These are absolutely unreal opportunities and we are filling our portfolios with these types of high probability, lower risk investments. There are so many more we can do, so if you have some capital outside not working, or that you are worried about how it is invested, it is a great time to add. Imagine stockholders in this security losing another 35-40%, and you’d end up making 12.36%, and as a worst case owning it at bargain levels with the potential to double or triple. Those are the scenarios we are manufacturing in my opinion.