The details of my Big Bet against Krispy Kreme

[DesertCat]

All of these options are puts I bought. I.e. KKD is trading at around $8.82, and I need it to trade below these strike prices on these days for these options to be worth anything.

49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715
50 KKDTU ($7.50 Aug) bought at 85 cents, cost $4,250
50 OKKMA ($5 Jan 07) bought at 45 cents, cost $2,250
9 OKKMZ ($2.5 Jan 07) bought at 15 cents, cost $135
20 YRDMA ($5 Jan 08) bought at $1.15, cost $2,300

Total investment (so far) around $10,500. I think I'm too heavvy in the short dated options (May & Aug) and I'm looking to add more 08's to balance things out better. As I add to my positions, I'll update this.

So there it is. If KKD turns out to be a great turnaround story under their new CEO, Brewster, you have this post as proof of what an moran I am. DesertCat blew over $10k betting against the best donuts in the world! Ha, ha! And he documented his own idiocy!

Of course, if I turn out to be right, don't expect me to keep my mouth shut. Oh yea, that's when I'll be results oriented, baby!

[Mr. Now]

First of all let me say I really enjoy reading your detailed fundamental analysis of this security.

Now, with these options, your analysis can be near-absolutely perfect, and:

1. You will lose $5965 on the May06 and Aug06 options, if the likely negative price events do not occur before Aug06 expiry.

2. The long-dated options can expire worthless if the likely negative price events do not take KKD below $5 from current $9 area.

Most option purchasers buy options that are too far out the money and/or with not enough time to expiration. This is the #1 cause of loss with options. See McMillan: OPTIONS AS A STRATEGIC INVESTMENT.

Most of the time value comes out in the 3 months before expiry. This makes near-dated options very risky, especially if/when any recent volatility collapses.

[AvivaSimplex]

Interesting. It looks like you put in 4x as much as you were originally intending? Definitely a big bet for your first options trades.

Good luck with this. I may join you depending on how the financials look and how the market reacts.

[Paluka]

[ QUOTE ]
First of all let me say I really enjoy reading your detailed fundamental analysis of this security.

Now, with these options, your analysis can be near-absolutely perfect, and:

1. You will lose $5965 on the May06 and Aug06 options, if the likely negative price events do not occur before Aug06 expiry.

2. The long-dated options can expire worthless if the likely negative price events do not take KKD below $5 from current $9 area.

Most option purchasers buy options that are too far out the money and/or with not enough time to expiration. This is the #1 cause of loss with options. See McMillan: OPTIONS AS A STRATEGIC INVESTMENT.

Most of the time value comes out in the 3 months before expiry. This makes near-dated options very risky, especially if/when any recent volatility collapses.

[/ QUOTE ]

Your analysis seems to imply that a bet that usually is a loser is a bad bet. I guess you don't like betting on underdogs.

[ahnuld]

buying the putt with the strike price of 2.5$ seems like a waste to me. No way it loses anywehre near 70% of its value in the next year. That one seems like pure spewage to me.

[DesertCat]

[ QUOTE ]
buying the putt with the strike price of 2.5$ seems like a waste to me. No way it loses anywehre near 70% of its value in the next year. That one seems like pure spewage to me.

[/ QUOTE ]

An announcement that they are out of cash and filing a pre-pack Ch. 11 that renders the equity worthless, drops the stock below $1. That's a scenario that I think happens a fairly good percentage of the time here.

[Mr. Now]

Paluka,

I like most longshot bets-- that is, bets with low win probability-- provided the win payoff is sufficient to generate long-run, better-than-marginal, positive expectation.

Since the rewards are typically estimates while the risk is typically a completely known quantity with options, I like to see a big estimated reward before I commit to said long shots.

Especially in a directional options bet.

[Sniper]

[ QUOTE ]
49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715
50 KKDTU ($7.50 Aug) bought at 85 cents, cost $4,250
50 OKKMA ($5 Jan 07) bought at 45 cents, cost $2,250
9 OKKMZ ($2.5 Jan 07) bought at 15 cents, cost $135
20 YRDMA ($5 Jan 08) bought at $1.15, cost $2,300


[/ QUOTE ]

Just to add some info for the beginners...

Best case scenario... Should KKD file for bankruptcy protection in the next 6 weeks (and trade down to let's say 50 cents)... Cat's roughly 10.6K bet is worth 100K+.

The slower burn scenario...

The May 7.50's is a bet that if/when KKD files financials by the end of this month or so, that KKD will trade down to a more realistic value... in the $5- range

The Aug 7.50's is a similar bet, but allows for presumably another quarterly financial disclosure. Notably, this is his largest bet!

The Jan 07's is a bet that the financial will continue to erode and the stock will slowly burn down, if it hasn't already filed ch 11.

The Jan 08's, Cat made the case (in the other thread) for why he believes there is a decent probability for KKD to go ch 11 in the next year or so.

Worth noting, should nothing bad happen to KKD until Jan 2008, and then they file ch 11 he will recover most of his bet (and it might be worth considering adding to the Jan 08s enough to ensure that)

I'm sure Cat will correct me if I got any of his thinking wrong.

p.s... Cat mentioned this is his first options trade... however, I'm sure this 10K is a relatively small portion of his portfolio... I do not recommend that others consider 180 options to be an appropriate number of options to trade for the first time, and you should always bear in mind the % of your equity at risk!

pps... Cat you didn't mention what your commission costs on this trade were?

[DesertCat]

Update, I bought more. Total investment around $17,000, total commissions look to be close to $400.

49 KKDQU ($7.50 May) bought at 35 cents, cost $1,715
50 KKDTU ($7.50 Aug) bought at 85 cents, cost $4,250
50 OKKMA ($5 Jan 07) bought at 45 cents, cost $2,250
100 OKKMZ ($2.5 Jan 07) bought at 15-20 cents, cost $1855
21 YRDMA ($5 Jan 08) bought at $1.15, cost $2,420
100 YRDMZ ($2.50 Jan 08) bought at 45 cents, cost $4,500

[mother_brain]

no 2+2ers buy any donuts for the next year.

edit: anybody mind explaining one of these lines a little bit, how you figured the cost and how to figure the gain and loss with different outcomes.