How Chad Padowitz is harvesting the GameStop exuberance

The AFR’s Jonathan Shapiro recently interviewed Talaria CIO Chad Padowitz about how for 15 years Talaria has been using options to generate income from the equity market, and lower the cost of buying into expensive markets.

The current market especially GameStop is a case in point. As Shapiro writes:

Investors that bought at the bottom became very rich, very quickly. Those that bought at the top suffered a rapid draw-down. As for GameStop’s operations, its last three quarterly profits – of around $US250 million ($322.2 million) – weren’t all that different to justify a $28 billion round trip in its sharemarket value in a matter of days.

As Shapiro notes, at Talaria we believe investors should get a higher return for that volatility, or get similar returns for lower risk and that is why we’ve spent the past 15 years applying our own unique approach to global equity investing.

“Investors were being sold funds on the expectation that the kind of long term returns from equities are there for everybody, at every point in time. The reality is that in very expensive markets, your expected return would actually be very low but your expected risk would be very high,” Chad said.

The net outcome is that Talaria is earning about 30 to 40 per cent more income from selling puts.

“We will pay for sustainable earnings and sustainable margins and pay a fair price for that,” he says. “What we won’t do is take a very optimistic view of long-term growth rates and assume them to happen.”

Read the full article here