Shipping is an industry that has been distressed since the Great Recession. Before the recession, shipping was literally booming and loads of shipping companies went public. Shortly after that, the macroeconomy went haywire and shipping never really recovered. The boom before the recession has caused too many orders for new ships. These new ships started coming online exactly at the wrong time, causing a huge overcapacity and a plunge in charter rates.
The industry is slowly working through this overcapacity. Older and less efficient ships are being scrapped while new ship orders are being delayed or even cancelled. As the global economy recovers, demand is recovering. The Dry Bulk Index has at times seen sudden spikes.
To me, its a matter of time that the shipping industry improves. In fact, during the short stock market slump in mid-2012, I went long some DSX stock at ~$5. The stock doubled and I thought it’d be a good time to sell, in anticipation of a pullback which never occurred. The stock went up even more but has since corrected a little.
I doubt I’ll get to see DSX at $5 so I’ll have to accept that I’ll have to rebuild exposure to the dry bulk shipping industry at a slightly higher level. I would be comfortable going long the stock again at $10, which was the price I had earlier liquidated at, but the stock hasn’t reached that level yet. Instead, I’ve decided to sell puts on DSX, taking advantage of the fairly high implied volatility. In the worse case scenario where I am put the stock, I establish a long position in the stock at a lower price. Otherwise, I get to collect a decent premium if my puts expire worthless. This is especially optimal since I have no idea when the dry bulk industry will start moving again so I collect yield to optimize my returns.
I sold 5 DSX Jan16’15 12 Puts @ 1.7. The stock is no longer covered by Morningstar. Below are the details of the transaction.
Economic Moat – None
Stock – $11.17
Strike – $12
IV – ~36.74%
Premium received – $1.7
Effective Buy Price – $10.30
Return of cash-secured put that expires worthless – 16.50%
If the stock falls further, I would probably sell even more puts or even long the stock.