The details of my Big Bet against Krispy Kreme

[mother_brain]

Down 3.XX% yesterday, and getting hurt some more today.

[derosnec]

Well, you know my thoughts. So many things you can do with 20k. Putting it on an unhedged highly illiquid deep OTM put is not the first thing that comes to mind.

Also, generally, a trade should be no more than 2%-5% of your bankroll (give or take). So, I'm assuming you have $400,000-$1,000,000.

Options Makers live for people like you. [img]/images/graemlins/smile.gif[/img] GL

Your report card so far:

Risk management: F
EV scouting: B

[Sniper]

derosnec... I disagree with your assessment... Cat's trade/investment is well reasoned, event driven, and as he's explained well within his risk parameters.

[derosnec]

It might be within his risk parameters but there is no risk management. Options spreads are high. As soon as you buy a put (especially deep OTM puts), you get a nice big fat red number in your P&L column because of the high spread. This is tied to the liquidity issue as well. I don't see any risk management here. His trade reflects a poker mentality: find a +EV opportunity (assuming this is +EV) but totally neglect the risk management aspect.

Edit: I do truly hope it works for him - I don't mean to come across that I want to see him (or anyone) lose money.

[cdxx]

[ QUOTE ]
It might be within his risk parameters but there is no risk management. Options spreads are high. As soon as you buy a put (especially deep OTM puts), you get a nice big fat red number in your P&L column because of the high spread. This is tied to the liquidity issue as well. I don't see any risk management here. His trade reflects a poker mentality: find a +EV opportunity (assuming this is +EV) but totally neglect the risk management aspect.

Edit: I do truly hope it works for him - I don't mean to come across that I want to see him (or anyone) lose money.

[/ QUOTE ]

you just reiterated all the reasons for not trading options, neglecting to mention any reasons to trade options. are you saying all option trades are bad? perhaps you think all options with low volume and/or wide spread are bad?

your comment on option issuers baffles me as well. options are not a scam, but you do need to know what you are doing. higher risk, but also greater reward. with great enough bankroll, this strategy is sound. are you arguing that DC's bet should have been smaller, because the likelihood of his hypothesis is slim? perhaps you can give some ballpark range to educate him (and me).

[Sniper]

[ QUOTE ]
It might be within his risk parameters but there is no risk management. Options spreads are high. As soon as you buy a put (especially deep OTM puts), you get a nice big fat red number in your P&L column because of the high spread. This is tied to the liquidity issue as well. I don't see any risk management here.

[/ QUOTE ]

Every trade/investment made starts in the red, due to spread and commissions. Nothing unusual here.


I suggest you review his thinking and implementation of this trade/investment, and you will see risk management throughout...

1. His risk is maxed at the cost of the options

2. His Max risk is within his comfort zone of <5% of equity

3. His potential return is many times his risk

4. He has spread his risk across multiple time frames, which allows for an oportunity to reevaluate at various points in time, thus leaving open the possibility of exiting the trade at less than max risk. (It is clear that he will be reevaulating his assumptions when the financials are released)

5. The trade/invesment is event driven with at least 2 primary events (the 1st financial release and a potential bankruptcy filing at a later date... other financial releases are also events), his expectations on any one have the potential to make the whole trade/investment profitable, in the absense of any other event being correct.

6. He's also evaluated the probability of being correct


The one area he hasn't covered is what his actions would be if there was an "adverse" event, for example a buyout offer.

What else would you be looking for in the way of risk management?

[Paluka]

He has simply made a wager on a longshot that he feels is undervalued. He paid some commissions and crossed some spreads to do this, just like you would do if you bet on a longshot to win the World Series in April. Trying to characterize these trades in any other way is pretty silly.

[derosnec]

No I don't think options are scam at all. I trade them. His approach, however, has no risk management. Why not construct a trade with protection? It's pretty common to do.

[John Shiznit]

I dont really see how you can have any protection in a trade like this.
With fairly deep out of the money options you just have to take the approach that there is a high probability of losing everything on the trade.
If you think a stock will crash why do it any other way.
Like somebody said though you should just make a trade like this is a small enough percentage of your bankroll that
a. you can repeat the trade for the next month's period (generally you have to be very patient in the stock market)
b. just make it a small enough percentage of your bankroll that is not a huge issue when it does not work out.

Yes writing options will probably yield huge profits every month. As the writers do have a field day. But it is the only way to buy stuff like this and gain the huge leverage advantage. Generally though the writers have enough backing to hedge out a trade like this by shorting the stock.
So basically if you know all this going in nothing wrong with doing the trade.
There are alot of disadvantages to straight short selling, also. So options definitely have some use in this type of trade.

[derosnec]

[ QUOTE ]


Every trade/investment made starts in the red, due to spread and commissions. Nothing unusual here.

[/ QUOTE ]

Yes, but OTM options (especially deep OTM) are really really red (really). Example, a stock selling for $40, will have spread of a few pennies, like 40.02/39.98. An OTM option's spread however will be huge. The JAN 08 $2.50 put he bought, for example, has a .50/.35 spread. That means, immediately, his P&L is 30% in the red.

I'm busy, so no time right now to go through the rest of your thread point by point. I guess risk is not much of a concern to him (or maybe he just doesn't know the different ways of structuring a hedged options trade), so maybe the argument is moot.