The details of my Big Bet against Krispy Kreme

[DesertCat]

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Desertcat,

Adding to a losing position is the cardinal sin of trading. What the heck are you doing ??

For the record, I jumped in with you in the beginning of the saga, and bailed out at a very small loss. The short interest provides way too much fuel for short-cover rallies.

What this means in practical terms is that a scant amount of (manipulative) buying can make this thing zoom in pretty short order.

You bought mostly out of the money with little time to expiration, this is also the way most of the money is lost in options.

I'd like to see Paluka of Aaron jump into this thread. They both know far more than me about options.

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Well I'm a value investor, as long as my thesis is intact, I don't close up shop because price action moved against me. But all your other points are valid. I did buy too many short dated options (and too many far OTM options). My new options are relatively long dated, and either ITM or close.

I still think that it's likely that KKD's value is substantially below current price levels. Though I'm not as sure about an actual liquidity crisis provoking bankruptcy, as there are so many moving parts I'm struggling to handicap the actual likelyhood. We should know more in June, I believe they have to file another NT-10Q, and they usually provide liquidity estimates.

[Sniper]

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I also added 10 OKKMV contracts (Jan $12) at $2.75 last week. They are my only ITM options, and they and the Jan $7.50s are the only ones showing a profit. The rest are in the red, red, red...

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It seems fairly obvious to me that using options to speculate doesn't have to be right anywhere near 100% to be a "+EV" play if you will. However, my understanding is that options are priced to be "zero EV." Also KKD seems to me to be a highly liquid, well covered company by analysts so IMO there's a high probability that the stock price is right i.e. that the market has not mis priced this company especially since KKD problems are known (the bad news is out) FWIW.

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Options are priced based on volatility... volatility, like variance is very difficult to predict and is not a constant... one reason to use Options is when you think that volatility will be more or less than expected over a given time period.

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Basically what you wrote doesn't contradict what I wrote. Guessing when volatility will be more or less than expected is just that a guess. One function of options is certainly to hedge risk. Another is to speculate. My point is that the pricing of options is "efficient" in highly liquid stocks. So is the pricing of the underlying security for that matter. Either the options are mis-priced, the underlying security is mis-priced, both are mis-priced or both are correctly priced. I'm stating that the market has probably correctly priced both with KKD IMO due to the factors I've mentioned.

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Most actions with results in the future are based on a guess, hopefully an educated and well thought out guess! [img]/images/graemlins/smile.gif[/img]

While in the long term stocks may move to be correctly priced at some point, the fact that prices fluctuate fairly widely on short time frames demonstrates quite clearly that individual stocks are not "correctly priced" at all times. In fact, they move like a pendulum from over to underpriced and back, and only on the rare occasion will they ever be priced at their proper value!

[Sniper]

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Adding to a losing position is the cardinal sin of trading. What the heck are you doing ??


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While Adding to a losing position is the cardinal sin of trading, somewhat paradoxicaly, it is the Mantra of Value Investors!

Know thy opponent... and sometimes your friend! [img]/images/graemlins/smile.gif[/img]

[hawk59]

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[ QUOTE ]
Adding to a losing position is the cardinal sin of trading. What the heck are you doing ??


[/ QUOTE ]

While Adding to a losing position is the cardinal sin of trading, somewhat paradoxicaly, it is the Mantra of Value Investors!

Know thy opponent... and sometimes your friend! [img]/images/graemlins/smile.gif[/img]

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adding to a losing position is either right or it's wrong. doesn't matter who you are.

[hawk59]

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Though I'm not as sure about an actual liquidity crisis provoking bankruptcy, as there are so many moving parts I'm struggling to handicap the actual likelyhood.

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I don't know whether you are right or wrong on this one. I personally don't think the bear story is all that convincing, but that's not a big deal. The problem is that like you said there are lot's of moving parts. Lots of moving parts means you can do a very good job handicapping each individual event, but still be wrong overall. And your strategy also means that you can be proven right eventually, but still lose money on your options if the process takes too long. And then you can always have a situation where shorts get nuked by management, which is what happened with RIMM, another short story that everyone knew, and that 'couldn't go wrong'.

I'm not attacking you here, but you should realize that this is a speculation. Just because you have done homework on the numbers and done a valuation and done all the other right things doesn't make this a value investment. A really good value investment is one where you KNOW you are going to make money under almost any circumstance. There's no way you can ever get that comforable with a put option strategy on KKD.

[Sniper]

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Adding to a losing position is the cardinal sin of trading. What the heck are you doing ??


[/ QUOTE ]

While Adding to a losing position is the cardinal sin of trading, somewhat paradoxicaly, it is the Mantra of Value Investors!

Know thy opponent... and sometimes your friend! [img]/images/graemlins/smile.gif[/img]

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adding to a losing position is either right or it's wrong. doesn't matter who you are.

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This is not true, as your perspective may be different based on the time frame you are trading/investing.

A short term Trader is either right or wrong quickly, and needs to act... a value investor is not concerned about the velocity of his money, just whether the value assessment has changed, and if it hasn't is not only willing to wait a long time to be right, but would see an adverse move as a reason to add to his position, as the margin of safety has increased.

[Sniper]

missed this the other day... more cash being spent, but the uncertainty is lifted.

WINSTON-SALEM, N.C., May 15, 2006 — Krispy Kreme Doughnuts, Inc. (NYSE: KKD) announced today that a proposed settlement has been reached resolving an ERISA class action filed on March 3, 2005 in the United States District Court for the Middle District of North Carolina against the Company and individual defendants including certain members of its Board of Directors, officers and employees. The settlement would include a one-time cash payment to be made by the Company’s insurer in the amount of $4,750,000. The Company and the individual defendants deny any and all wrongdoing and would pay no money in the settlement.


The lawsuit alleges that the Company and the individual defendants breached duties with respect to the management and administration of the Krispy Kreme Doughnut Corporation Retirement Savings Plan (the “401(k) Plan”) and the Krispy Kreme Profit Sharing Stock Ownership Plan (the “KSOP”) (collectively the “Plans”). If the settlement is finalized, it will impact members of a settlement class consisting of the Plans’ participants from January 1, 2003 through May 12, 2006. If the settlement is finalized, in addition to the cash payment by the Company’s insurer, the Company will amend the Plans to cause the merger of the KSOP into the 401(k) Plan. Several contingent events must be satisfied before the settlement becomes final, including preliminary and final approval by the United States District Court where the matter is pending. It is anticipated that if the United States District Court gives final approval to the proposed settlement, this matter will be resolved finally by the end of calendar 2007.

[DesertCat]

20 more contracts for OKKMB at $1.55 ($10 Jan puts).

And the settlement of the ERISA action costs KKD nothing, it's paid by insurance. Interestingly it doesn't restrict the employee shareholders from participating in settlements of the broader securities fraud cases. As they still have many other legal issues to resolve, this was a minor settlement. I'm not sure if their insurance has any coverage caps this will apply towards.

[adios]

I've covered this ground before as to why stocks trade in ranges.

Here's what someone far more knowledgable than I has to say about market effeciency in part:

What is an efficient market?

An efficient market is one where the market price is an unbiased estimate of the true value of the investment. Implicit in this derivation are several key concepts -

(a) Contrary to popular view, market efficiency does not require that the market price be equal to true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random.

(b) The fact that the deviations from true value are random implies, in a rough sense, that there is an equal chance that stocks are under or over valued at any point in time, and that these deviations are uncorrelated with any observable variable. For instance, in an efficient market, stocks with lower PE ratios should be no more or less likely to under valued than stocks with high PE ratios.

(c) If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or over valued stocks using any investment strategy.



BTW KKD was up big time today.

[hawk59]

Adios,

Do you really believe that nobody has been able to consistently find over valued or under valued stocks?