The details of my Big Bet against Krispy Kreme

[nineinchal]

Never bet against fat Americans in a donut eating contest.

[DesertCat]

[ QUOTE ]


given the money you spent on options, why not just short the stock outright and buy a call at a stike you're comfortable with (i.e. one where (K-S0)*your investment is your maximum comfortable loss or something like that...you'd earn money on the call though as St approached K so you could probably go a bit higher than you would if it was a non traded european option)

Barron

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Inexperience. Shorting with a call would have been an excellent strategy with KKD. Especially because they weren't paying dividends and were unlikely to ever pay one, so there was no cost to the short. And a long dated call at $15 or so would have been very cheap insurance.

I'm a long investor, and rarely use options. This was a very good learning experience, and I'll hopefully apply the lessons learned someday, but I don't expect to short anything any time soon.

[ahnuld]

what date would you buy the call for? Lets say you had to do this bet today (to make the timeline easier), so you short the stock this morning and buy a call that expires...in 2 years? In 6 months?

[MiloDanglers]

DesertCat or DcifrThs,

I'm trying to learn anything I can about investing/trading but shorting a call doesn't make sense to me. If you could elaborate on this and how it would hedge your bet I would appreciate it.

Thanks

[DcifrThs]

[ QUOTE ]
DesertCat or DcifrThs,

I'm trying to learn anything I can about investing/trading but shorting a call doesn't make sense to me. If you could elaborate on this and how it would hedge your bet I would appreciate it.

Thanks

[/ QUOTE ]

i'd term this a "covered short" rather than "shorting a call" to be a nit.

typically "shorting a call" means writing a call from what little practical experience i have with this.

does that cover it or do you need a clearer explanation than what has been given in this thread?

Barron

[DesertCat]

[ QUOTE ]
DesertCat or DcifrThs,

I'm trying to learn anything I can about investing/trading but shorting a call doesn't make sense to me. If you could elaborate on this and how it would hedge your bet I would appreciate it.

Thanks

[/ QUOTE ]

The problem with shorting is that your risk/reward ratio is reversed, i.e. if you short at X, and the stock goes to zero, you make X. But if the stock goes to 4X, you lose 3X. If it goes to 10X, you lose 9X. If it goes to 100X, you lose 99X, etc.

So buying a call at 2X would cap your losses at 1X plus the cost of the call.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
DesertCat or DcifrThs,

I'm trying to learn anything I can about investing/trading but shorting a call doesn't make sense to me. If you could elaborate on this and how it would hedge your bet I would appreciate it.

Thanks

[/ QUOTE ]

The problem with shorting is that your risk/reward ratio is reversed, i.e. if you short at X, and the stock goes to zero, you make X. But if the stock goes to 4X, you lose 3X. If it goes to 10X, you lose 9X. If it goes to 100X, you lose 99X, etc.

So buying a call at 2X would cap your losses at 1X plus the cost of the call.

[/ QUOTE ]

but there are tons of risk mitigating strategies like the covered short. you can only lose a certain amount there.

you seemed to jump right in with tons of complex strategies picking up premiums and what not that i wouldn't ahve jumped into.

i like to keep things simple as possible.

Barron

[DesertCat]

[ QUOTE ]
what date would you buy the call for? Lets say you had to do this bet today (to make the timeline easier), so you short the stock this morning and buy a call that expires...in 2 years? In 6 months?

[/ QUOTE ]

Dcifrthis might have a more intelligent/sophisticated approach, but I would buy a Jan. 09 $10 call for 30 cents, essentially capping my max loss at around $6 (assuming a $4.30 shorting price). The next shortest available is Feb 08 and that's too short I think. I'd like about a years coverage. I wouldn't pay extra for two years, because I can just buy another one year when the first year expires, and the 2010 option costs 2.5x the 09, plus there is the time value of money.

But I wouldn't short this stock anymore. It's down over $2 to $4.02 right now. Shorting KKD now would be like jumping off a pancake, to quote the master.

[jumbojacks]

[ QUOTE ]
Krispy Kreme update: They just announced a bad quarter and the stock dropped below $5 today. Essentially revenues continue to decline, more franchisees have shut down, and they are shutting down a distribution center. A few weeks ago one of the big hires they made in the upper management turnaround team left.

The most concerning part is that they are required to prepay $5M of their debt each quarter. Cash is back down to $25M. Everything that I wrote about is (slowly) coming true. Eventually I think this POS breaks their covenants and files for bankruptcy. Even if I'm wrong KKD has certainly proven it's not a growth story (and even at $5 it's trading at over 4x book value).

But the lesson is these things can take a long time. My timing was very poor and my use of shorter duration options killed me. Most expired worthless, and the ones I sold only recovered about 25% of what I put in them. I still own some jan 08 $5 and $2.50 puts, the $5 puts are now suddenly worth some money, but still much less than I paid for them. My guess is it's unlikely events will occur rapidly enough for me to make much more out of the remainder.

I learned how difficult it is to make money from short ideas. I used options instead of short sales to cap my downside risk but if I had shorted the common and just held it until now I would be up around 35% or so. But it doesn't matter, cause it's not something I'll likely do again. Making money on the long side is infinitely easier and less frustrating than going short.

[/ QUOTE ]

At least from watching this somewhat closely, the one thing I've learned is that CATALYSTS are so critical to a short position. I think initially your shorter dated puts seemed like a +EV bet, but in retrospect, knowing what I've learned about the current management and the board over the last few months, there's no way that those puts were ever +EV. I think the likelihood of delisting was overestimated and I think it's somewhat obvious now that they intentionally delayed submitting those filings.

I think I've read in a previous post that valuation shorts are bad plays, particularly in regards to KKD, by Scorpion Man. From my experience with this stock, I think once this turned into a valuation short, the price is pretty much at the mercy of the volatility of the market. Am I off in my reasoning here?

I've definitely had a lot of fun following this pig fly and hopefully we'll see it tank. [img]/images/graemlins/smile.gif[/img] Thanks for your coverage DesertCat. I look forward to seeing more posts in the future.

[ahnuld]

thinking of shorting crocs (crox) but dont want to face the unlimited downside of a pure short