I have been writing a good deal about Event-Driven trading lately on this site; largely because the results have continued to be so strong and I feel that by sharing a few of the strategy types, I can get your mental gears rolling.
Q2 2020 hedge fund letters, conferences and more
Three weeks ago, I wrote about the unusual situation at Dillard's, Inc. (NYSE:DDS) where there were more shares short than in the float at a time when the company was actively buying back shares and shrinking the float. The cue that something was imminent, was the increase in borrow cost. As a result, Dillard’s shares have rallied strongly as shorts were forcibly bought in. If this were any other month, I’d be pressing my bet and probably buying cheapie calls. Instead, I’m a man on a mission and my mission is de-grossing.
It is now less than one month from the election and I’ve promised myself that I’ll be net cash ahead of that moment—as I expect incredible opportunities to fall from the sky. As a result, if it’s not a core position, I don’t intend to own it after October option expiration. Today in the afternoon, the market started to wobble as it seems that stimulus talks broke down (yet again). I have no insight into if they reach an agreement or not, what I do know is that I want to shrink my event-driven book and I chose to toss my Dillard's, Inc. into the close, a few ticks under $41.
Borrow Costs Are Still Over 90%
Was this the right move? Who knows? My gut feel is that Dillard's, Inc. is going higher because borrow costs are still over 90%. Then again, the shares are up over 20% since I wrote about them and my cost basis was a few bucks lower still. With the election less than a month away, I’m more focused on cutting back, than I am on maximizing the upside in trades. In any case, this is yet another victory on the Event-Driven side—increased borrow costs seem highly indicative of squeezes. That said, the float is still tight and I did write a few October puts today, which would get me back involved again should the shares decline.
As with all Event-Driven trading, the key is taking the fat part of the trade and not being greedy. It’s about consistency and repeatability. It’s about managing a diversified book of high probability outcomes. The focus is on finding events that are predictable and repeating them, while making sure that no single trade moves the needle too dramatically. Event-Driven has been good to me, but with a highly volatile event imminent, there’s no need to press my luck.
Disclosure: Funds that I control are short various strikes of Dillard's, Inc. (DDS) puts.
