Startup Idea: Fight Evil | Hacker News Reader

Startup Idea: Fight Evil

kirubakaran.blogspot.com

7 pointskirubakaran15 comments

Regarding put options on SCO - it's not as simple as this. If you get the timing wrong you'll get hit with margin call. Certainly, SCO's stock did go up at periods during the IBM case. Selling short has what Satyajit Das would call "the bad kind of leverage" (the kind where you're exposed to potentially infinite losses).

> Watch out for options expiry though.

Also worth considering - I'm not sure what happens if you pick a failure so well that they de-list before your delivery date.

> Microsoft, anyone?

I read someone give a good example somewhere where Microsoft showed how dangerous it was to play short. In the 80s you might have looked at them and how poor their technology was and bet against them - 'Unix will come to the desktop and wipe them out!'. Then.. 'OS/2 will kick their ass!'. Then.. 'Digital Research now has a better DOS!' Suddenly you're having to sell your house to meet margin call, and fifteen years later their stock is still work a fortune.

> Consult your accountants and financial experts before > proceeding with this idea.

And only ones who don't have anything to gain from your decision one way or another.

For me the key questions is "Am I a trader?" Since I'm not, I recognise that I'm better off playing it safe with the market and putting my energy into fields where I have a hope of understand the play properly and being competitive.

If you're even vaguely interested in derivative investments I strongly recommend reading _Traders, Guns and Money_ (by Das). It's a good sequence of pirate stories. He also picked sub-prime well before it happened.

From "Money, Money, Money" by Philip Greenspun (http://philip.greenspun.com/materialism/money):

It is 1986. You buy yourself an IBM PC. You are using MS/DOS and say "This sucks. It isn't even as good as operating systems from 1960." You're a computer expert so you know that the technology is pathetic. You do some business research and find that out that the company making this MS/DOS product didn't even have the in-house expertise to build it itself. They bought it from another company!" You call your broker and find out that this "Microsoft" company is publicly traded and selling for a very lofty price/earnings ratio. You smell blood and say "I want to short 100 shares of Microsoft."

Your broker is holding many shares of Microsoft in "street name" for other customers. So he can very easily find 100 shares of Microsoft to lend you. He lends you these 100 shares, and you sell them immediately. Suppose that the price/share is $10. You get $1000 that you can put into the bank. However, you owe your broker 100 shares of Microsoft Corporation. No problem, you figure. In another year, this company will be near bankruptcy and selling for $0.25/share. You'll buy 100 shares to cover the short for $25, thus making a profit of $975 less commissions.

Well, in another year, Microsoft is not selling for $0.25/share. In fact, it has gone up to $30/share. You still owe the broker 100 shares, but those 100 shares would cost $3000 to buy. You have a paper loss of $2000 right now. Your broker calls and wants you to put up some assets where he can get at them, either cash or stocks. He doesn't trust you to come up with the cash to cover your Microsoft short unless the cash is physically under his control. You consider cutting your losses by closing your position. Remember that it is 1987, though, and Microsoft hasn't gotten any better at writing software. In fact, they are flailing around trying to copy the Apple Macintosh interface, itself a copy of a Xerox system from the mid-1970s. What a bunch of losers. You put up the extra cash.

By 1996, Microsoft has split a bunch of times and you now owe your broker 1000 shares at $150/share. That's $150,000 to cover the short. You sell your house and say "You know, that potential return of $1000 was not worth ten years of agonized scanning of the stock pages, margin calls, and an ultimate loss of $150,000."

Per this idea, shorts on the insurance companies dealing with the WTC were trading at 30x their usual volume in the days leading up to 9-11. So the WTC was destroyed, insurance companies took a bath and whoever shorted their stock became quite rich. Most of these funds have since been traced back to Al Qaeda associates.

I call this "outsider trading." His example of Greenpeace shorting Exxon before suing them is quite similar to the example I just gave. I have no idea if this sort of behavior is regulated by the SEC the way insider trading is. I think it's generally un-ethical though.

"Most of these funds have since been traced back to Al Qaeda associates"

Do you have a link to back that up? Haven't heard that before.

I'm pretty sure it's illegal to place bets against an insurance company knowing that your associates are going to destroy property that company insures. I'd put it under conspiracy to commit arson though, not insider trading.

Ooh! I thought I was just making money, but I was also fighting evil. My awesomeness cannot be contained.

I spotted an immediate opportunity as soon as they opened up the box of trouble that is a baseless lawsuit against IBM. I shorted SCO during their long decline. It took longer than I expected, and I bought to cover before the end (which still hasn't quite come), because I wanted to avoid more tax hassle (I was short on SCO something like three years ago, and the end really hasn't come yet). I personally followed SCO from before all of the trouble, because of some intellectual property issues I had with them, so I already knew they play fast and loose with copyright and IP (I won't go into detail, because I'm pretty sure the non-disclosure from the settlement is still in effect).

>I was short on SCO something like three years ago, and the end really hasn't come yet)

Nasdaq delisted them this morning.

That was expected (bankruptcy filings were announced a while back, and companies in bankruptcy can't be listed on NASDAQ). Hopefully, everyone who was short SCO has sold to cover before now. SCO, the company, still exists, and still has ongoing lawsuits, unbelievable as it sounds. But, you're quite right that this is the end of the SCOX stock story. I don't foresee them recovering from this--have you seen their new products in the mobile space that they intended to be the next big thing? They're so bad and so clearly not viable that I have to assume there was something semi-fraudulent going on...like raising more money from credulous investors.

Here's the problem:

Truth will always win out, but it won't always win out quickly. At some point, you need to cover your short positions and your put options will expire, and if truth hasn't won out yet, you can land yourself in a world of financial hurt.

Note that this is just the more problem w/ shorting and put options and why these instruments are typically only used by people w/ access to large amounts of capital - they can afford to wait it out.

Indeed. As John Maynard Keynes put it, The market can stay irrational longer than you can stay solvent.

Empirica Capital does (or did) something similar. Their strategy is based on the belief that securities are overvalued because investors underestimate the effects of rare catastrophes. So Empirica slowly bleeds away their investment capital by buying way-out-of-the-money put options and then waits for a catastrophe.

That's Nassim Taleb's thing, right? I get the impression from the book and various things (his wikipedia page) that it's not something he's involved with any longer. Is it still operative?

Yes, Taleb and Spitznagel. I don't know if that fund is still around. I couldn't find much information on it.

Fighting Evil is more fun if you get to run around wearing pajamas and a cape!

If you buy/sell your stocks and options online, you can! (I guess you still could, even buying down at the local Schwab office...but I'm not sure what kind of service you'd get.)

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