The Shorting of Frauds, Overhyped and Bankrupt Stocks Journal
- Thread starter Daal
- Start date
what do you mean, Daal?
This is shaping up to be a really good thread.
About frauds - I suspect that it may actually be better to simply wait for the fraud to be 'catalysed' i.e. wait for the stock to get broken, either by a convincing Muddy Waters style report that sends investors panicking out, with a huge down day; or government investigation; or senior management resignation; whistleblower; or accounting irregularities announced. The stocks almost never go down enough on the day of the announcement, because huge funds can't exit all in one day, so you have a free ride for the next few weeks at least.
Since options have time decay, and shorts have major risk if the stock enters la la land for a few months, it is better to wait for the catalyst. You get to define your risk (the stock should never trade back above the pre-announcement price if you are correct in your short thesis), you get almost perfect timing, and you get immediate momentum in your favour. This is far superior from a trading perspective, compared to the endless waiting for a fraud to reveal itself and investors to stop smoking the crack-pipe - which can take literally years in some cases.
I remember buying 2 year puts on one BS housing stock in 2007. Believe it or not, by 2009 the company was still solvent! Of course it eventually went to zero, but it hung around way longer than it should have, by all rights.
So, I favour shorting, or buying puts on, stocks that have already had the negative catalyst, and downward momentum has begun; rather than the sit & pray approach. Why suffer unnecessary pain when easy trades come along sufficiently often?
About frauds - I suspect that it may actually be better to simply wait for the fraud to be 'catalysed' i.e. wait for the stock to get broken, either by a convincing Muddy Waters style report that sends investors panicking out, with a huge down day; or government investigation; or senior management resignation; whistleblower; or accounting irregularities announced. The stocks almost never go down enough on the day of the announcement, because huge funds can't exit all in one day, so you have a free ride for the next few weeks at least.
Since options have time decay, and shorts have major risk if the stock enters la la land for a few months, it is better to wait for the catalyst. You get to define your risk (the stock should never trade back above the pre-announcement price if you are correct in your short thesis), you get almost perfect timing, and you get immediate momentum in your favour. This is far superior from a trading perspective, compared to the endless waiting for a fraud to reveal itself and investors to stop smoking the crack-pipe - which can take literally years in some cases.
I remember buying 2 year puts on one BS housing stock in 2007. Believe it or not, by 2009 the company was still solvent! Of course it eventually went to zero, but it hung around way longer than it should have, by all rights.
So, I favour shorting, or buying puts on, stocks that have already had the negative catalyst, and downward momentum has begun; rather than the sit & pray approach. Why suffer unnecessary pain when easy trades come along sufficiently often?
Lebed has been pumping SYNC Synacor. Probably good for another few points here.
I agree with this. Muddy reports might not be enough though. I'm still getting killed both on FSIN and to a smaller extend on FMCN even though they were already exposed. Government investigations are definitively a strong catalyst though
UBNT might be under a informal SEC investigation right now
Ghost> I put on a small position at first +-0.5% of portfolio and start adding to full 2.5% position when the downward momementum has begun. I start with this small position just so the stock is on my radar sometimes.
Reasons to open short: 1) bad fundamentals
2) strange price action (squeezes etc. )
3) bad rumors about the company
Reasons to open short: 1) bad fundamentals
2) strange price action (squeezes etc. )
3) bad rumors about the company
2 potential KCG trades
-Shorting on bk rumors that a leaked by a reputable news agency(bloomberg, reuters). Uptick rule complicates things but you HAVE to chase
-Short before the close betting on overnight no deal(at a premium) or bk filling
2nd one is more risky. I wish I knew more about this business model and the ins and outs of this sector. I'm forced to guess here, so only a small position is warranted. On the 1st one I'm willing to bet a lot of money(PCX replay)
-Shorting on bk rumors that a leaked by a reputable news agency(bloomberg, reuters). Uptick rule complicates things but you HAVE to chase
-Short before the close betting on overnight no deal(at a premium) or bk filling
2nd one is more risky. I wish I knew more about this business model and the ins and outs of this sector. I'm forced to guess here, so only a small position is warranted. On the 1st one I'm willing to bet a lot of money(PCX replay)
Bullish points
-KCG has very good technology(I spoke with a MMer who worked for them in the 90's) that has significant value
-Stock has been hammered so it could attract idiots
-It has a history of profitability even after the loss($1.4B in retained earnings)
Bearish Points
-People stopped routing to them even though there is no counterparty risk(Which means any remote counterparty risk and they won't deal with them at all, the credit lines almost surely got cut, clients are probably pulling cash out of the brokerage)
-Egan Jones says they need $600M in capital. Market cap is ~$300M, they can't raise that. Only way they can survive is a merger, since the company will assume liabilities and have to pony up $600m in capital in a business with potential lawsuit liabilities and declining profits they will not pay a lot for that equity, take under becomes possible
-No buyer means bk, business would just keep collapsing
-CEO refused to comment on credit lines, this means they got cut(at least some of them)
-KCG has very good technology(I spoke with a MMer who worked for them in the 90's) that has significant value
-Stock has been hammered so it could attract idiots
-It has a history of profitability even after the loss($1.4B in retained earnings)
Bearish Points
-People stopped routing to them even though there is no counterparty risk(Which means any remote counterparty risk and they won't deal with them at all, the credit lines almost surely got cut, clients are probably pulling cash out of the brokerage)
-Egan Jones says they need $600M in capital. Market cap is ~$300M, they can't raise that. Only way they can survive is a merger, since the company will assume liabilities and have to pony up $600m in capital in a business with potential lawsuit liabilities and declining profits they will not pay a lot for that equity, take under becomes possible
-No buyer means bk, business would just keep collapsing
-CEO refused to comment on credit lines, this means they got cut(at least some of them)
good posts
bearish scenario: Potential suitors wait till bankrupsy to get the assets on the cheap.
bullish scenario: too much in the news. shares can attract buyers.
bearish scenario: Potential suitors wait till bankrupsy to get the assets on the cheap.
bullish scenario: too much in the news. shares can attract buyers.