Shorting the Online Gaming Stocks

[Taylor Caby]

I want to put a disclaimer on here that I am by no means an expert. Just a young kid looking for some feedback on an idea.

When all of the potential online gaming bills started to pop up early this year and into the summer, I figured that if things were looking grim I would short as many online gaming stocks as possible. I underestimated how quickly the bills could be passed and for some reason thought (naively, i suppose) I would have more of a warning that such legislation was impending before it actually passed.

Now, I'm thinking back to what I should have done. I have made all of my money either through playing poker or through my business which depends heavily on online poker. Wouldn't it have made sense for me to short the online gaming stocks 12 months ago, regardless of my outlook on internet gaming in the US? This would act as a hedge and would've provide me with sizable returns should the laws have passed (as they did). If the laws didn't pass, there is no reason why I wouldn't continue to make high 6/low 7 figures a year doing what I am doing so I would be pretty content either way. From my perspective, I really missed out here.

Now, doesn't this still apply to me? Can someone tell me if it makes sense for me to do the same thing now for the same reasons? My outlook on the industry isn't necessarily negative, but I feel like this could be a smart hedge for someone who makes all of their money from this industry.

Any advice on this situation would be appreciated, even going as far as explaining (hypothetically) what you would do in my position.

Thanks,
tc

[john kane]

i have had a big interest in the gaming shares, having bought 888, party and sporting bet but sold most of my holdings too early. anyways, i wish i could claim what im about to write as my own, but it's not, it's from an article, but i think it should be of some interest. I won't type out the entire article as it will take ages, but the gist is:

Recently gaming shares shot up a decent % due to Barney Frank possibility of tabling a bill to reverse online gambling in the US (as im sure you know). party shares rose over 35% in the past 6 weeks.

is this exuberance justified?

probably not:

- there is little political support for lifting the ban; it's already taken this long for someone to try to come to the gaming sites defence. also the timing of any repeal is uncertain, given Bush's administration it wouldnt happen till 2009. even then, if it did happen, it would be replaced by a system of licences and taxation.

analysts from Goldman Sachs points out:

If it becomes legal, party shares are worth 110p (currently around 54p).

If not, they are worth 39p.

if the current value were to be 50p, then the market has priced a 15% probability on the ban being lifted.

this may be realistic, but if the shares go much higher, especially above 60p, then pricing is closer to 30% which is too optimistic, hence a good time to sell.

hope that's of some help.

john

[TLC]

If you're willing to look at this as "buying insurance", then you should investigate buying put options on them vs. short selling. This way your downside is limited (think of the put cost as an insurance premium), but if the underlying stock(s) tank, you will be rewarded greatly.

[NajdorfDefense]

[ QUOTE ]
Wouldn't it have made sense for me to short the online gaming stocks 12 months ago, regardless of my outlook on internet gaming in the US? This would act as a hedge

[/ QUOTE ]

This is not a hedge. You could lose money at poker and lose shorting any sector. You could win a little at poker and lose far, far more shorting stocks. Given your introduction, you should stay far, far away from shorting.

Therefore, you were correct not to do it.

Using 20/20 hindsight, obviously shorting any stock that has dropped since then would have been a 'winner.' But that's ROT, as should be obvious. Just becuase 6h4h woulda made a straight flush this hand doesn't mean you should play it every hand.

[Shoe]

If you were following these forums, you had plenty of notice that there was an extremely good chance that the internet gambling ban bill was about to pass. For most stocks, you do not get much, if any, advance notice like this. In this case you had a few days notice that this was probably going to become law, so you had plenty of time to get your shorts in. Anoter good example is when Party and Empire split up -- We found out about here before there were press releases.

[jumbojacks]

[ QUOTE ]
[ QUOTE ]
Wouldn't it have made sense for me to short the online gaming stocks 12 months ago, regardless of my outlook on internet gaming in the US? This would act as a hedge

[/ QUOTE ]

This is not a hedge. You could lose money at poker and lose shorting any sector. You could win a little at poker and lose far, far more shorting stocks. Given your introduction, you should stay far, far away from shorting.

Therefore, you were correct not to do it.

Using 20/20 hindsight, obviously shorting any stock that has dropped since then would have been a 'winner.' But that's ROT, as should be obvious. Just becuase 6h4h woulda made a straight flush this hand doesn't mean you should play it every hand.

[/ QUOTE ]

I think a pure hedge against tc playing poker might run into the problem you've suggested, but what about his business, Cardrunners? It sounds like he's generating a good amount of income from his business worth considering to hedge.

[GoodCallYouWin]

The problem is, online gaming makes huge amounts of money with little cost. Why short a business like that exactly?

[catalyst]

[ QUOTE ]
The problem is, online gaming makes huge amounts of money with little cost. Why short a business like that exactly?

[/ QUOTE ]

Pulling out of the US means losing a great deal of customers - which will obviously destroy their bottom line. I haven't researched this, but I would assume their best international area of possible growth is within the US (considering individuals wealth, poker exposure on TV, etc), though Asia could be a big marketplace if poker caught on and if online gambling became legal there (two huge ifs)... With the US out of the picture, how do these online gaming companies grow?

JK's article had some interesting info - most notably that party's stock was up 35% recently. Again, I haven't researched any of this, but this creates a nice opportunity to short these stocks (though not necessarily as a hedge).

[Tupacia]

Taylor, it makes a bunch of sense for you to have some sort of hedge in place as both of your sources of income (playing poker and Cardrunners) are dependent on online poker staying legal in the U.S. ( to a large degree). Put options would make more sense than a simple short would (as if poker truly becomes illegal in the U.S. then the gaming stocks will collapse instead of fall a little bit). I would also investigate getting an insurance policy on the proposition (think Lloyd's of London or some other exotic insurance company). Just as every big-name draft pick who stays around in college for another season takes out insurance in the unlikely event of an injury (Matt Leinart did it), you too should look into this possibility. If online poker becomes illegal in the U.S. and you have a sizable insurance policy, you get a large sum of money. If online poker stays legal, you're out the insurance premium but you're still raking in money by playing and through Cardrunners. PM me if you have any more questions.

Najrdorf - I think you're missing the point of his post. His point isn't that he would have made a bunch of money by shorting those stocks, it's that he should have done so to protect his downside as his livelihood is based on poker being legal.

[NajdorfDefense]

[ QUOTE ]
Najrdorf - I think you're missing the point of his post. His point isn't that he would have made a bunch of money by shorting those stocks, it's that he should have done so to protect his downside as his livelihood is based on poker being legal.

[/ QUOTE ]

Gimme an effing break, I understood his point completely. Shorting a few thinly traded stocks is not a terrific hedge against chronologically unknown legal and regulatory risk. This is obvious, and if it is not obvious to you, you should immediately cease giving advice on this board in these matters.

I have PMd some thoughts to Taylor on these matters. My only qualifications are that I've pretty much been doing this stuff, using forwards, options, and other hedging instruments, for about my whole professional career, working with the richest clients on earth. Shorting is extremely dangerous for even pro investors, Taylor would need a sizable short position to act as even an imperfect hedge, plus further large amounts of cash to use as collateral, and further margin calls on top of that. If your timing is off, you lose on both sides, period, end of discussion.

Naj

[the poker metaphor was just a metaphor, guys. ]