Insider info...well..not really

[Breand]

Just got back from a dinner with the "Elite Hamptonites" portion of my wife's family. Three of the people were hedge fund managers and one of them was talking about being friends with Steve Eisman and how he was big on shorting for-profit education such as APOL and ESI. Steve Eisman is basically famous for making hundreds of millions by shorting the subprime mortgage market. He's also featured heavily in The Big Short, the newest book from Michael Lewis. I thought I was getting some insider info but when I came back I looked it up and its public knowledge so...meh. Here's a blog on it. The sophmoric response from the CEO of APOL has me convinced Eisman is right.

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In any event it's knowledge I wasn't aware of and will be my first attempt at shorting a stock.

[Vanraw]

Problem with shorts of course is the loss is potentially limitless. I recall reading some idiot shorted AOL back in the day. It went up and up and up and up.

But education seems like a safe bet it wont go through the roof.

[Diggles]

sorry, but there is no profit in any sort of education

[Grieve]

If you want short but limit your losses, buy puts.

I did my first short (on BP) a few weeks back and made some money, but generally I'd rather stick with puts.

[Jakensama]

sorry, but there is no profit in any sort of education

As a former employee of Kaplan test prep, I beg to differ - that place was a gold mine..

[Breand]

sorry, but there is no profit in any sort of education

APOL by itself has a market cap of 6.8 billion...so somebody is making a lot of money off education.

[Jarbauq]

It must not be Diggles then...

[Breand]

If you want short but limit your losses, buy puts.

I did my first short (on BP) a few weeks back and made some money, but generally I'd rather stick with puts.

Question on calls and puts: Do you need the money to cover the full purchase price of shares, or is it all done automatically when you excersize the option?

For example: A buy a call option for 100 shares in BP at $50. If it goes above $50 to say $60 and I want to excersize the option, do I technically need $5k to initiate the purchase before I sell the stock, or do I just excersize the option and I get my profit?


$60 - $50 a share = my profit - premium

[Grieve]

In your example, you bought the right to buy 100 shares at $50. Let's say it was for October expiry - right now that would cost you 14 cents (actually $14, you always pay 100 times that, since it's 100 shares). It's cheap because the stock is only $38 right now.

If the stock went up to $60, say in September, that call would likely jump up in value to around $12 ($1200). If you sell at that point, you would never have actually owned the shares. You would have put in $14, and gotten out $1200. You would not have need to have $5,000 in your trading account.

Now...if you'd held the option to expiry on October 23rd, you might have found that your brokerage automatically buys 100 shares of BP at $50 - for example, I use eTrade and they do that. If you had no cash in your account, you would have logged into your account to find that you suddenly had $5000 in margin! It's happened to me before. However, since your stock would be worth $6000, you'd be fine...unless of course BP suddently dropped.

I never (intentionally) hold options to expiry, unless they are worthless.

[Vanraw]

Breand the short answer is no, you do not need shares to cover your calls or puts unless your the writer of the contract.

But keep in mind that when the contract expires its done, there is no value to the contract.

In many ways its like rolling the dice. I have made quite a bit of money, and I have lost some. But the way I use them is very much like gambling....

I have never used options in the way they were intended, ie covering an actual position I own for risk mitigation. Its usually a very short term focus on a bet that the stock is going to make a certain move on the short term.

[Grieve]

I'm the same way - gambling only.

The way you should use them is, if you own 100 shares of AAPL and you think the stock may go down, buy a put as a hedge against that happen. The benefit of that is you don't have to sell your shares, which might trigger a regular-income tax event if you've held them less than a year. Or if you sell at a loss, could prevent you buying them back when you want to due to the wash sale rule.

Same with calls - if you own stock and you think it isn't going anywhere for a while, you can sell calls for income. Selling a naked call (without you owning the underlying stock) would be pretty risky. I've never written a call, I only buy them.