Large Investors Seem to Be Bullish On This Sector
When analyzing large investors it is important to watch what they do rather than focus on what they say. While their comments are easily found on CNBC and other financial media sites, their actions are also readily identifiable from the news.
For example, recent news seems to indicate that large institutional investors appear to be bullish on real estate. We can draw that conclusion from the fact that a large investment fund is raising billions of dollars from large investors. It seems as if the investors were bearish, they would simply do nothing in that sector. Their actions actually tell us more than any statement would.
Business Wire reported,
Blackstone (BX) today announced the final close of its latest global real estate fund, Blackstone Real Estate Partners IX (“BREP IX”). BREP IX has $20.5 billion of total capital commitments — the largest real estate fund ever raised. Blackstone is also currently investing two regional opportunistic funds, the €7.9 billion BREP Europe V and the $7.2 billion BREP Asia II.
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Kathleen McCarthy, Global Co-Head of Blackstone Real Estate, said, “This fundraise reflects the excellent relationships we have with our limited partners given the strong results the BREP funds have generated for them since 1991. We are grateful to our investors for their ongoing support and look forward to putting this capital to work on their behalf.”
Added Ken Caplan, Global Co-Head of Blackstone Real Estate: “Despite the challenging investment environment, we continue to see compelling opportunities around our highest conviction investment themes. BREP IX’s scale allows us to commit capital globally in a differentiated set of complex transactions.”
In June, BREP IX committed to its initial investment, the purchase of GLP’s U.S. Logistics Assets for a total of $19 billion, alongside other Blackstone vehicles. This acquisition is expected to close in the coming weeks.
Blackstone is a global leader in real estate investing. Blackstone’s real estate business was founded in 1991 and has $154 billion of investor capital under management. Blackstone is one of the largest property owners in the world, owning and operating assets across every major geography and sector, including logistics, multifamily and single family housing, office, hospitality and retail.
BX appears to be consolidating after a recent run up.
The weekly chart shows that additional gains could develop since the run up was not extreme.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BX could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for BX
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For BX, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $52.50 call option can be bought for about $1.75 and the October 18 $55 call could be sold for about $0.70. This trade would cost $1.05 to open, or $105 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $105.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in BX the maximum gain is $1.45 ($55 – $52.50= $2.50; $2.50 – $1.05 = $1.45). This represents $145 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $105 to open this trade.
That is a potential gain of about 138% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.