Knock Out Daily Accumulators and Daily Range Accumulators

Business Money
1

Last one for the day - Stock Accumulators.

Has anyone tried these? Here’s how a KODA (Knock Out Daily Accumulator) has been explained to me. For this example, we’ll define one as Gazprom 1yr Boosted 83.25 / 105

Gazprom is the world’s largest gas company, and of utmost importance to Russia’s governnent & economy. It has a GDR listed in the London stock exchange, denominated in USD.

For this accumulator, you agree to purchase US$100,000 worth of Gazprom shares over the course of 1 year. You buy 10 shares a day at 83.25% of the initial spot. Let’s say its trading at USD 46.75, then you are buying 10 shares a day at US$38.92 per day for one year (or until you’ve spent 100 large)

The risk is if Gazprom shares close below US$38.92 on any day, and then you have to buy double (or 20 shares) for that day. Of course, if you believed this was what was going to happen, you’d be shorting the stock instead.

If Gazprom stock closes at or above US$49.09, you will stop accumulating and your obligation to buy Gazprom at US$38.92 will be cancelled. Ideally, at that point you are then left with shares of a blue chip purchased at a nice discount - a very rough dollar cost average of, say, 10% to 12% (I calculate this by considering the discount between stop price (105%) and purchase price (83.25%) so its a very very rough calculation)

The important thing here is that it is a blue chip stock. So over time - maybe a long time - there is a good chance it will return to your purchase price.

At least I think this is how it works :slight_smile: Have you had any good or bad experiences?

2

But you have no idea how much the company is worth do you? So assuming the stock will just continue upwards is a bit of a gamble no?

3

Yes, it is definitely a gamble - all of this investment stuff is

But it won’t be too difficult to come up with a valuation of the company if I had to - its listed in London, and is the bluest chip in Russia. Or, at least, it will be easy to get an analysts valuation or 10 from bankers. Furthermore, if you are a technical investor, you could careless about the valuation of the company.

I think I’m a little of both - value investor and technical. I like good stories (concepts), but I won’t ignore the market environment since it has an impact on the position like it or not. Also, I’m not that long (a view) an investor, so if I have to liquidate, I better mind what’s happening technically.

Back to your original questions, however, this isn’t a play on whether the company will go up. Remember, there is that 5% cap. Once it touches +5% game is over. This is a play that it will trade in the range for a year. You get a range of 83.25% to 105% of spot to play in. If you are lucky, it stays in the range for 6 to 9 months - enough time to build a sizable position. When a year is almost up, it goes up a measley 5% from where you started, then you sell your position asap and reap a nifty +26+% in less than a year.

If it’s a dog and you’ve called it all wrong, you have 100 large worth of Gazprom. The value investor in me says, that’s not a bad place to be.

I’m pretty familiar with Gazprom. You often hear about it in the international news because it supplies Western Europe (and Eastern Europe?) with heat (not a bad position to be in for the next 5 months, eh?) It’s the kind of company that the Kremlin can’t afford to screw around with, Yukos not withstanding (that was a personal/political dustup and everyone - including the Ivans running Gazprom has learned from it). And on top of all this, it’s an energy play - so there’s a little bit of Iraq impact (thanks W) to keep things afloat for the foreseeable future (I don’t expect a pullout in a year, and even if this happened, the instability is going to keep energy prices high. Well, or so I’m “betting” :wink:)

4

Hmm.

I understand as a day trader why you’d be interested in the technicals, but this is an energy play, they tend to be highly cyclical and you are potentialy tying yourself into a long position, no?

HG

5

[quote=“Huang Guang Chen”]Hmm.

I understand as a day trader why you’d be interested in the technicals, but this is an energy play, they tend to be highly cyclical and you are potentialy tying yourself into a long position, no?

HG[/quote]

Thanks for asking. I should clarify.

I brought up being technical because I see this as a trading range kind of bet. I don’t read candles or hi-los, so I admit I’m using the term very loosely (as in “momentum”, I guess).

Here is the stock’s 52-week historical. You can see that for almost the past 6 months, it has traded within the range of the KODA - ~39 to ~49


Note: this issue only IPOed a year ago apparently

What’s my concept?

Looking at this chart, what are the chances Gazprom will breakthrough $49 in the next 12 months? Except for a couple of weeks in the summer when it spiked up - during a particularly active day in Baghdad I’d wager (I’m being facetious, but I’d bet it was Iraq/Energy related). It does look like it’s hit a resistance point. This is good. My objective is to stay in the range and then move up near the end (hmm, when is the next election in Moscow?)

What’s the downside? Remember, I’m losing money if this thing slips below $39, but that’s ok because the real gamble is if it recovers by next Dec. I see strength from below, because, hey, it’s the Russian Gas monopoly and for the next Quarter, they’ll be delivering heat to Western Europe. So barring a huge terrorist attack on Russia (a real possibility), prospects look safe in my view.

Looking at the chart, it would seem we are heading to a turning point, or whatever real quants call it these days.

Again, this isn’t “long” as far as I’m concerned. Our definitions of “long” may not be the same. I’m not up on the latest lingo. I see positions of a year or less as “not long”.

Trying to explain this has made me feel a lot better about going into the deal. The example that I gave above was something I was offered 2 weeks ago. The range I’m being offered today is actually even wider (78% strike instead of 83.25%), so it’s even more attractive.

Had we started this 2 weeks ago with the terms in the example, I would have 100 shares of Gazprom today and still very much in the money (to mangle another bit of jargon). I do hope there are others who have done these things and can correct my understanding. But I’ll look to jump in tomorrow

6

By the way, unlike typical dollar cost averaging, in this scheme, there are no extra fees costs for the accumulation of shares - cost is strike (78% of agreed upon spot). I guess this is because the trading house just allocates it from their own inventory anyway.

Actual transaction cost will come when the accumulation ends. In my case, this includes a 1% broker’s commission, (Min. GBP50), so if I accumulate very few shares, then get knocked out, the GBP50 min becomes expensive per share.

Other fees: GBP20 (UK), custodian fee, UK Stamp (0.501%) - (Purchases Only), PTM Levy (GBP1.00 Flat) (Purchase & Sales)