{"id":12060,"date":"2023-01-30T13:43:24","date_gmt":"2023-01-30T18:43:24","guid":{"rendered":"https:\/\/stockspinoffinvesting.com\/?p=12060"},"modified":"2023-01-30T14:48:48","modified_gmt":"2023-01-30T19:48:48","slug":"the-strategy-john-malone-uses-to-generate-income","status":"publish","type":"post","link":"https:\/\/stockspinoffinvesting.com\/the-strategy-john-malone-uses-to-generate-income\/","title":{"rendered":"The Strategy John Malone Uses to Generate Income"},"content":{"rendered":"

The Strategy John Malone Uses to Generate Income<\/strong><\/h2>\n

John Malone is one of the best operators and investors in the world.<\/p>\n

He is profiled in value investing cult favorite The Outsiders<\/em><\/a>.<\/p>\n

Malone is best known today for running the Liberty Media complex, but he started his career in the cable industry at TCI.<\/p>\n

Here\u2019s a quote from The Outsiders<\/em>:<\/p>\n

\u201cFrom his debut in 1973 until 1998 when the company was sold to AT&T, the compound return to TCI\u2019s shareholders was a phenomenal 30.3 percent, compared with 20.4 percent for other publicly traded cable companies and 14.3 percent for the S&P 500 over the same period.\u201d<\/em><\/p>\n

My favorite investor, Joel Greenblatt, wrote about him in You Can be a Stock Market Genius<\/em><\/a>.<\/p>\n

<\/p>\n

I\u2019m writing about John Malone for two reasons.<\/p>\n

Reason #1: He recently employed one of my favorite options strategies.<\/p>\n

Reason #2: He employed the above strategy to gain exposure to one of my favorite stocks.<\/p>\n

First let\u2019s talk about the strategy.<\/p>\n

Naked Put Selling<\/strong><\/p>\n

Before I get into Naked Put Selling, I just want to emphasize that you should never sell naked puts on thocks that you don\u2019t want to potentially own<\/strong>.<\/p>\n

Selling a Naked Put just means that you sell a put option with a strike price below the underlying current stock price.<\/p>\n

This has two benefits:<\/p>\n

Benefit #1: You generate current income.<\/p>\n

Benefit #2: If your put option gets exercised, you establish a cost basis in the stock below the current share price.<\/p>\n

Warner Brothers Media (WBD) and John Malone<\/strong><\/p>\n

Warner Brothers Media (WBD)<\/strong> is one of my favorite current spin-offs.<\/p>\n

It was established when AT&T (T) spun off Warner Bros and merged it with John Malone\u2019s Discovery.<\/p>\n

The basic investment pitch is as follows:<\/p>\n

    \n
  1. The Warner Bros. combination with Discovery created an attractive media asset that is well positioned in the near, medium and long term.<\/li>\n
  2. $3.5BN synergy target by 2024 is achievable and likely conservative.<\/li>\n
  3. Management team is highly incentivized to increase WBD\u2019s share price.<\/li>\n
  4. At 12x current FCF, WBD\u2019s stock looks cheap on an absolute and relative basis.<\/li>\n<\/ol>\n

    Mario Gabelli agrees. Here\u2019s Mario from a recent Barron\u2019s article<\/a>:<\/p>\n

    <\/p>\n

    <\/p>\n

    Now let\u2019s turn back to John Malone\u2026<\/p>\n

    Back in November, John Malone sold 20,000 naked put contracts<\/a> with a strike price of $10 and expiration May 15, 2023 for $1.18.<\/p>\n

    What does this mean?<\/p>\n

    It means:<\/p>\n

      \n
    1. Malone received $2,360,000 of cold hard cash in November.<\/li>\n
    2. If WBD closes below $10 on May 15, 2023, Malone will have the obligation to buy 2,000,000 shares at a price of $10 per share.<\/li>\n<\/ol>\n

      But because he has already collected $1.18 per contract of income, his effective cost basis would be $8.82 ($10 – $1.18).<\/p>\n

      I love Malone\u2019s approach because it\u2019s a win win.<\/p>\n

      Either he gets to keep $2.35MM of cash<\/p>\n

      Or he gets to buy a stock that he loves at a ridiculously cheap price (implied valuation of 7.1x free cash flow).<\/p>\n

      Finally, Malone sold the put contracts when WBD implied volatility was peaking.<\/p>\n

      <\/p>\n

      Options are more expensive when volatility is high so in hindsight, this trade looks even more brilliant.<\/p>\n

      Interested in options trades like this?<\/p>\n<\/div>\n\n