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Netflix, Inc. Message Board

  • alinastein alinastein May 7, 2013 5:36 PM Flag

    out of the money puts vs shorting

    When a stock is barreling non-stop to crazy town, shorting is too risky, as I learned after last earnings.
    Fortunately I was nervous enough to buy 200 may calls as a hedge.
    Sold those last week for a nearly 4x gain.
    Hope to make back the rest of my loss and maybe more when this pos corrects this year.
    Happy with my 150 Sep puts.
    Limited capital at risk.
    July earnings could be ugly and this could be pounded that much harder if market is also correcting as I suspect it will.

    Sentiment: Sell

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    • There are reasons people short, not least because it's an account credit which they see as a freebie, but most great investors resist the temptation:

      -the market bias is upward due to growth, scarcity and government policy;
      -with a short, the best you can do is double your investment whereas the potential long is unlimited;
      -if a stock is in the high speculative 'stupid end' of the price curve, it has already proven it behaves irrationally;
      -the math of percentage gain favors longs (e.g. a $5 stock that zooms to $10 is a 100% gain whereas the same move down from $10 to $5 is a 50% gain);
      -although shorties may be right that a stock is overvalued, it can take forever for the stock to retreat to 'fair price' as past experience has shown with stocks such as Yahoo, Dell and Amazon.
      -buy-outs offers (no matter how stupid) are announced After Hours, crushing shorties.

      We all see stocks that appear overvalued. It takes discipline to resist and a few shortie naysayers are consistent winners, but bear in mind that the Hedge Fund shorties are widely diversified and only risking a tiny portion of their portfolios.

      Disclosure: I short almost every day in intraday trades (with Stop Losses) but never long-term unless paired to minimize risk. Nor do I take small short positions. Token positions are poor use of my admittedly limited brains cells.

    • I think you're doing the right thing. I think too many people, other than day traders, will see the 200's as too risky to buy in. The company promises revenue but it appears that content costs grow more or less proportionally with subscribers and now that they are years in, they are barely making a profit. I'd guess that you won't have to hold through next earnings. We'll see a slow steady slide of 1-2 dollars each day. For each person who is long, 204 is a good price if you bought in at 180. Take it and buy back in later.

 
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