STONECO: Brazil's Fintech Fiesta (-22%)
When The Free Market Says Go Fugg Yourself.
Executive Summary
Adopted a long wide strangle strategy, rolling the call down and out in time while maintaining original risk levels.
Escaped with a -22% return, highlighting the unpredictable nature of short to mid-term directional plays.
Recap Situation
StoneCo rebounded from a steep price drop, achieving significant revenue, volume, and customer growth. We adopted a long, wide strangle strategy, leveraging the low premium for balanced risk-reward.
However, an overly ambitious maturity date led to a fast decline in our option premium. We responded by extending the call to January 2024 and dropping the put hedge, converting the position to a straight long call while preserving the initial risk level.
See the updated article below for further details.
Why Now
Navigating this ride underscores the risks of short to mid-term directional plays. Despite probabilities and careful analysis, outcomes can be unpredictable, and we take a small hit on our “lottery ticket”.
We've all had our Bob Iger moments, humbled by the free market's unpredictable 'go fugg yourself' moment. Learning from this, we've exited the trade and plan to focus on spreads or LEAPS for any future directional plays. These are more forgiving if the price moves in the wrong direction and are somewhat more repairable.
One could technically bet on a further share price rise to break even, but we've had enough. Should the price take a breather and retrace, we would not have enough time to see through the next leg higher; we only have 46 days left on the contract.
Trade Execution
Trade Entry - June 5, 2023
The options chains were relatively liquid that day, considering it’s an emerging market play; our average fill was 0.71.
Total: 0.71 Debit.
Trade Update - Aug 1, 2023
We closed our short strangle. We got filled at the lower end of the bid / ask spread.
Total: 0.60 Credit.
We rolled into a long call 15 with a January 2023 expiration. We got filled at the upper end of the bid-ask spread.
Total: 2.30 Debit.
We have kept our risk constant without increasing our position. The cost for the call, set at $2.30 for each new contract, will not exceed our original risk level of $0.71 per initial contract. In other words, as we only gained $0.60 from the trade roll, the carried-over risk into the roll will be limited to $0.60 times the number of original contracts.
Trade Close - Dec 4, 2023
We are closing our long call. Due to high demand, spreads are tight, and options are liquid.
Total: 2.12 Credit.
Trade Return
The absolute return on this trade is
-0.71 [debit trade entry & overall risk] + 0.60 [credit trade roll] = -0.11
-2.30 [debit trade roll] + 2.12 [credit trade exit] = -0.18
→ -0.11 - 0.18 * (0.60/2.30) = -0.157
The overall risk taken was 0.71, which leads to a return on equity of
-0.157 / 0.71 = -22.1%
All MacroDozer articles are purely educational; they are not tailored to any particular individual or portfolio and do not constitute investment advice. Let us know if you are interested in implementing any of our ideas. Perhaps we can help or point you in the right direction.