Comment by cturner | Hacker News Reader

Comment by cturner | Hacker News Reader

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."

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