The details of my Big Bet against Krispy Kreme

[Off Duty]

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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.

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And it's a hard lesson to learn.

I thought the real estate market was oversold in 2002 in SoCal. I think I was right then, I know I'm right now. But just because I am/was right doesn't mean the market can run against you for a LONG LONG time.

[eastbay]

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

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Stop loss? It isn't going to gap up 1k pts.

eastbay

[ahnuld]

yeah but I think it could run against me for awhile yet. Shorting and buying a jan 09 call gives me the abilitiy to see the stock rise really high then crash to 10$ without me sweating.

[APXG]

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yeah but I think it could run against me for awhile yet. Shorting and buying a jan 09 call gives me the abilitiy to see the stock rise really high then crash to 10$ without me sweating.

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i have never traded options or read any books, but the short to medium expiry deep otm calls seem very highly priced, especially compared to the puts. i don't see why the market is pricing in vol into the upside so much heavier than into downside at this point. from this, the hypothesis seems that crox is a company that is better positioned to weather economic turmoil / liquidity issues way way better than both its competitors and alternate investment opportunities, which i think is flat out wrong in the medium term b.c. a) it is widely held by the very people who will be having liqui probs ifwhen they arrive and b)how many of its holders actually see it as a long term investment?

so my plan would be to monitor the spread between puts and calls, and make sentiment decisions based on its rate of tighetning or disappearing altogether. i cannot envision a scenario where crox shareprice is collapsing while the current put to call relationships hold. there would have to be signif putbuying and thus tightening of the spread.

meanwhile id start by writing deep otm calls b.c. i am confident that if general market vol and crox vol does increase, it will not be to the upside b.c. a)its already huge and b)b.c. people are not gonna start flocking en masse into a obv spec play in the current conditions.

one thing that scares me is my logic was probably widely applied in 98-99 to tech and obv lost its users a lot of $$$, though not more than outright shorts -- which i would not do right now with crox b.c. it would be too strong of a disagreement with the underlying opinion that the options pricings present, and a general life theory ive discovered is that while you obv wanna find spots to disagree, you want to avoid scnearios where you disagree "too strongly" b.c. then you are presuming a personal "edge" that is just too unrealistic and is good sign that YOUR feel is off rather than that of the counterparty, though this could be mitigated by extreme expertise in rare occurences(i.e. soros vs. gbp in 92), obv not here.

ahnuld,
what would be the approx borrow fees associated with shorting the crox common?

[ahnuld]

man I need to get my online accounts up to speed. They wont even let me buy/sell options or short sell.

APGX, if by that you mean my margin rates, I can get prime + 50bps using my online broker for margin trades.

[mrbaseball]

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



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Thanks to this thread I just took a look at that chart. It really looks toppy. I started investigating some put spreads and really like the idea of a Jan 08 50/45/40/35 put condor buying 50's and 35's and selling the 40's and 45's but I think the volume is way too low to be able to get anything on at a reasonable price. I think I'll play around with it on Monday and see just how wide the spreads are.

[whyherro]

Just something to watch out for, but if KK does indeed file the bankruptcy will last a pretty long time and the equity will not fall to zero unless news comes out that the negotiations are to wipe the equity. Until something like that, even if they file, the equity is going to hold pretty decent value due to its optionality in the discussions and will likely receive a decent percentage (think 3-5%) of the valuation to cooperate in the negotiations.

[ahnuld]

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



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Thanks to this thread I just took a look at that chart. It really looks toppy. I started investigating some put spreads and really like the idea of a Jan 08 50/45/40/35 put condor buying 50's and 35's and selling the 40's and 45's but I think the volume is way too low to be able to get anything on at a reasonable price. I think I'll play around with it on Monday and see just how wide the spreads are.

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I just wikied put condor and have a basic idea what you are doing but could you explain this in more detail please?

[jumbojacks]

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Just something to watch out for, but if KK does indeed file the bankruptcy will last a pretty long time and the equity will not fall to zero unless news comes out that the negotiations are to wipe the equity. Until something like that, even if they file, the equity is going to hold pretty decent value due to its optionality in the discussions and will likely receive a decent percentage (think 3-5%) of the valuation to cooperate in the negotiations.

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Not unless bk is a pre-pack. I doubt existing shareholders would be able to recover much and if bk is announced, this should fall < 1 into the pennies.

Edit: If you think recovery is about 3-5%, then at today's current trading price, it's about $0.12-0.20. I guess that's close to $0.

[whyherro]

Well, 5% is generally the # for noise equity. It's definitely not going to be a prepack, its kind of out of the question for a company this large and the different groups of creditor classes.