The details of my Big Bet against Krispy Kreme - Page 8

schnoodleC · #71 04-21-2006, 04:11 PM

One difference between buying and shorting is with shorting the "why now" question is especially important. If a stock that I've shorted goes up 10% I absolutly take the loss, though usually I'm out before that. The short is usually no longer more attractive at that point, there is usually something wrong with your short idea in terms of the "why now". A good example of this was when I shorted BEAS a few months back. It went up on buy out rumors I felt were false. I also felt that the business was fundamentally weak I shorted and covered and made around 8%. It went up again and I shorted again. It then climbed further. On further research I felt the latest climb was due to renewed business strength so I covered for only a 4% loss. It is since up about 20% more. So, the rise showed that my idea was wrong and I cut my losses.

KaneKungFu123 · #72 04-22-2006, 01:57 AM

how does buying options with cash/margin work? on tdwaterhouse, my margin is 2x my cash. so if i buy 10k worth of puts on margin, as long as i keep 5k in cash on my account then its ok? or do i have to lock up cash now until 2008?

KaneKungFu123 · #73 04-22-2006, 02:09 AM

i just tried to fill an order and i got a message that i am not authorized to trade options and to call 1-800 number [img]/images/graemlins/frown.gif[/img]

Evan · #74 04-22-2006, 02:28 AM

What do you think the chance is for your May puts to finish in the money?

DesertCat · #75 04-22-2006, 02:45 PM

[ QUOTE ]
What do you think the chance is for your May puts to finish in the money?

[/ QUOTE ]

Not good. The financials they just reported (revenues, same store sales, debt, and cash levels) were very poor (declining sales, sales per store, cash levels and available liquidity). They announced they had a material weakness in their financials and that their auditor was going to reference that (and presumably this means the financials are unaudited and unsigned) in the 2004 10k (FY 2005) they were going to file, and that they would be filing no other financials, so they'll remain a year behind.

Yet the price has basically shrugged off all this bad news, and it's trading back where it was beforehand. I think the NYSE will start the delisting process as soon as April 30th passes with no audited financials. But why would the market care about delisting if it doesn't care about plummeting sales?

I think they'll need to get another waiver from their lenders at this point. And remember, the cash levels they reported are from Jan. 28, so presumably cash and liquidity has declined further. So I'm banking on some severe action taken by the lenders, which might be unlikely.

Think about it, if you are the lenders, your loan is secured by all the assets of KKD, i.e. land, buildings, equipment, the business itself. But if they run low on money and you try to foreclose to take them over, you essentially force KKD into bankruptcy. In bankruptcy, a judge has to take into account legal claims, i.e. the fraud alleged in both shareholder and franchisee suits. Maybe the lenders are afraid of what might happen in bankruptcy, that their "secured" assets might have to be shared with the victims.

I'm not sure exactly how those legal claims are treated in bankruptcy, so this is just in theory. But maybe the lenders have some huge incentives to keep KKD out of bankruptcy and hope for a turnaround. If that's the case, KKD gets another waiver, and maybe even more working capital. And my puts expire way out of the money.

I think all will be clear the first week in may.

hawk59 · #76 04-22-2006, 05:46 PM

delisting has pretty much been a non-event the past couple years. before that you could usually count on a sell-off but not anymore. if anything, it alerts people to some company in trouble that they might have missed otherwise.

KaneKungFu123 · #77 04-28-2006, 03:41 AM

Is option trading closed now until after they release earnings?

Sniper · #78 04-28-2006, 04:15 AM

[ QUOTE ]
Is option trading closed now until after they release earnings?

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Huh??... Options can be traded whenever the Exchanges where the options trade are open. (assuming someone is willing to take the other side of your trade)

Sniper · #79 05-03-2006, 02:02 AM

[ QUOTE ]
49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715

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13 trading days till expiration... the April catalyst didn't cause the desired effect, no new catalysts till July...

options worth .10 (maybe .15)... so this is roughly a $500 decision...

What's the EV on this Push or Fold decision??

DesertCat · #80 05-03-2006, 10:18 AM

[ QUOTE ]
[ QUOTE ]
49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715

[/ QUOTE ]

13 trading days till expiration... the April catalyst didn't cause the desired effect, no new catalysts till July...

options worth .10 (maybe .15)... so this is roughly a $500 decision...

What's the EV on this Push or Fold decision??

[/ QUOTE ]

The rational decision seems to be fold (sell at .10). But there are also random catalysts that could happen (CEO resignation, liquidity crisis, or just gradual realization co. is in bad shape causing a two week stock slide, etc) in the next three weeks. Assume the random catalyst would produce a stock price of $5 (where it traded two months ago), adnd an option value of $2.50.

Essentially my upside is huge (25x) for an unlikely event. Is the event a 25-1 long shot? I don't think it's that unlikely, I'm thinking it's closer to 12-1. I'm reading "fooled by randomness" right now, and just finished a chapter where he talks about taking small losses looking for big, but unlikely, events. Makes one think about how much value is in these options, even if they are highly likely to expire worthless.