US Market

Sea Limited $SE Reports This Week – Hedging My Position

Calvin Lo

Sea Limited (SE) reports Q1 2022 earnings before open tomorrow Tuesday 17th May.

Source: Earnings Whispers

I’m down pretty big on my SE position at the moment, around -66% from my cost basis of $223. SE last closed at ~$75 as of this writing.

Although we had a few good green sessions to end last week, the overall macro environment is still weak and sentiment still bearish.

Recently, many high growth companies especially unprofitable ones have been punished heavily after reporting earnings despite showing good numbers. Just a few quarters ago, investors (or punters) were pushing up prices after earnings despite even lousy numbers.

With that in mind, I’m hedging my position in SE against potentially big decline due to earnings.

Over the past few quarters, Sea has managed to beat revenue estimates, but not EPS estimates. If Sea misses on both this time, things could get ugly.

Source: Investing.com

Strangely, analysts on Tipranks still have an average price target on SE of ~$188 (166% upside). Doesn’t sound right to me though, since I’ve seen quite a few analysts reducing their PTs on SE recently. Oh well, we shouldn’t put much weight into these PTs anyway. Just something I like to check to get a feel of Wall Street sentiments on a certain stock.

Source: Tipranks

Last week, I’ve hedged my SE position by buying a protective put option against my 18 shares of SE. Specifically, I bought 1 lot with $50 strike price expiring on 20 May 2022 that cost me US$150. At the point of purchase, SE stock price was ~$63.

The reason I’m using this hedging strategy is because I’m bullish on Sea long term, but I’m bearish in the short term and especially want to reduce risk going into earnings in this bearish environment.

How it works as a hedge is that this put option should increase in value as the price of the underlying SE stock declines, and vice versa. However, the max loss is the price of the option – in this case, US$150. But the upside is theoretically unlimited.

I think of it like buying term insurance to neutralise potential huge declines in the short term. Options are usually useful for the short term (since there’s an expiry date). In this case, I’m trying to reduce my downside risk. The flip side is that my upside will be reduced by what I paid for the option, i.e. US$150.

This way, I’ll lose less if SE continues to decline and may even make a profit if the stock drops hugely after earnings. However, if SE goes up sufficiently to cover the cost of the put option, I profit too. I will lose money though if SE price hovers only slightly above $63 upon expiry. Hopefully not. Let’s see how things play out.

So far since I hedged, the value of my SE long has increased more than the decline on my SE put option.

Just a short update. Just sharing what I’m doing, please don’t follow. To all SE bag holders (including myself), all the best tomorrow!

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