Sorry for the delay posting this. Internet problems.

1-900-GOOGLE

Doug Simpkinson: ‘The main problem I have with the business plan for 1-900-GOOGLE is that . . .I can already search Google. Infone gives you a personal concierge – I don’t know if they can look stuff up on Google for you, but it’s pretty close. Google has an SMS (text messaging) service – you can do searches for business, or even limited Google searches like ‘population of India.’ Who doesn’t have a cell phone with SMS nowadays? This has mostly replaced Infone for me, as SMS is cheaper. Remind me to sell my Infone stock. Yahoo has a similar thing.’

WHEN YOU CAN’T AFFORD A DENTIST

Jeff Bauer: ‘This article by Malcolm Gladwell in the August 29th New Yorker is yet another stunning indictment of the current health care situation in the U.S.’

☞ In small part:

The Moral-Hazard Myth
by Malcolm Gladwell

Gina, a hairdresser in Idaho, whose husband worked as a freight manager at a chain store, had a peculiar mannerism of keeping her mouth closed even when speaking. It turned out that she hadn’t been able to afford dental care for three years, and one of her front teeth was rotting. Daniel, a construction worker, pulled out his bad teeth with pliers. Then, there was Loretta, who worked nights at a university research center in Mississippi, and was missing most of her teeth. ‘They’ll break off after a while, and then you just grab a hold of them, and they work their way out,’ she explained to Sered and Fernandopulle. ‘It hurts so bad, because the tooth aches. Then it’s a relief just to get it out of there. The hole closes up itself anyway. So it’s so much better.

. . .

If your teeth are bad, you’re not going to get a job as a receptionist, say, or a cashier. You’re going to be put in the back somewhere, far from the public eye. What Loretta, Gina, and Daniel understand, the two authors tell us, is that bad teeth have come to be seen as a marker of ‘poor parenting, low educational achievement and slow or faulty intellectual development.’ They are an outward marker of caste. ‘Almost every time we asked interviewees what their first priority would be if the president established universal health coverage tomorrow,’ Sered and Fernandopulle write, ‘the immediate answer was ‘my teeth.”

YOUR HUMMER

If you don’t already get ‘The Progress Report,’ why not sample this past Thursday’s and see if you want to receive them daily. Thursday’s lead item explained how the Administration’s new fuel efficiency standards actually encourage automakers to produce bigger, more fuel inefficient vehicles – and actually forbid states to do better. (‘Buried on page 150 of the regulations is this provision: ‘A state may not impose a legal requirement relating to fuel economy, whether by statute, regulation or otherwise, that conflicts with this rule. A state law that seeks to reduce motor vehicle carbon dioxide emissions is both expressly and impliedly preempted.”)

JESUS V. STEVE FORBES

Joe Devney: ‘You asked, ‘Do you think Jesus would have favored a flat tax?’ I think the beginning of chapter 21 of the gospel of Luke makes it clear that he would not. Jesus is in the temple at Jerusalem. ‘He glanced up and saw the rich putting their offerings into the treasury, and also a poor widow putting in two copper coins. At that he said, ‘I assure you, this poor widow has put in more than all the rest.” The temple at Jerusalem may or may not be analogous to a modern government, but the point that giving should be proportional to wealth is unmistakable.

Craig Gawel: ‘Jesus drove the money changers out of the temple, He didn’t give them tax cuts. The story of Jesus is one of compassion for the poor and troubled.’

SHORTS VS PUTS

Steve Stermer: ‘What are the pros/cons of buying puts vs shorting a stock like NTMD that one expects to drop? I shorted it (so far, so good), but see that you bought puts. I know that I have more potential for loss than you do, but how do you decide which approach to take?’

☞ Great question.

Generally speaking, it’s a matter of balancing two things: the size of the premium you have to pay for the puts (if it’s wide, you are tempted to avoid it by going short) with the amount of risk you can afford to take by going short (if you have $10 million, shorting 200 shares of some stock is a trivial risk; if you have just a little money to play with, you should never, ever, ever short stocks – but might gamble on a put).

The advantage of puts: your loss is limited to what you bet. There is no worse feeling than seeing a stock, overvalued at $80, go up and up to $400 before crashing back down to what you (perhaps rightly!) thought it was worth in the first place. Yes, your judgment was vindicated, but you got wiped out first.

Another possible advantage is that with appropriate approvals from your brokerage firm, you may be able to buy puts for your retirement plan. You can never short stocks in an IRA. (Even if you get approval, puts – being really risky – generally do not belong in a retirement plan.)

A third potential advantage is that, if you buy very long-term puts – expiring in more than a year – and you do hold them more than a year and win, your profit will be lightly taxed as a long-term capital gain. That is never true of a short sale, even if you wait 20 years before taking your profit. (Long-term puts, called LEAPS, are not available for NTMD.)

A fourth advantage: your put position cannot be disrupted before expiration. It’s a contract. Whereas with a short sale, your broker may call you at any time to say that the lender of the stock you borrowed (and sold short) wants his stock back (so you have to buy it back to cover your short so he can return it). That doesn’t happen frequently, but it happens – and never at a time you would want it to.

The disadvantage of puts: you pay a premium to buy them. And you can get whipsawed, losing 100% of your bet, as the stock holds steady or drifts up for a while – only to crash days after your puts have expired worthless.

Another disadvantage: if you do make money with puts, it’s all taxed.

Yes, profits on shorts are all taxed at ordinary rates – but only when you take your gain. Some short-sellers try never to take their gains. For them, the ideal stock is shorted at $90 (say), falls to $2, and just hangs on. In that situation, they have use of the $88-per-share gain tax-free. Yes, there’s a risk the stock could go back to $90. But the more likely ‘risk’ is that the stock will become totally worthless, at which point the IRS deems a ‘taxable event’ to have occurred. Tax is then due on the entire $90 profit – which is a risk if you long ago spent the entire profit on a round-the-world cruise.

But OK. Back to the question: what to do if you think a stock is likely to head down? Buy a put? Short some shares? Every situation is different.

The most important thing to say is that most people should not ordinarily do either one. Especially selling short, which can be very difficult to manage emotionally. With shorts, you can get squeezed, hammered or bled to death. (You may even have to PAY dividends.)

Puts, though less risky, are a ‘zero sum game’ – less commissions, spreads, and taxes. Over time, it is a mathematical certainty that most people will lose money gambling with puts and calls.

Having said that, some situations – for those with money they can truly afford to lose – offer a good opportunity.

With NTMD, the December 30 puts were appealing because (for example), with the stock at $23 and the puts at $8 or so, you were paying only a modest premium over their $7 intrinsic value. (The right to sell something at $30 that you can buy for $23 is intrinsically worth $7.) You were paying a $1 premium to limit your loss to $8 a share instead of running the risk of shorting the stock at $23 only to see it shoot to $90, losing $67 a share.

(Yes, you could cover your short and take your loss long before $90 – but would you? Or would your instinct be to short MORE, because now, as it rose, it had become even more obviously overvalued? Like so many of the tech stocks in 2000 that hit $100 or $200 and have since disappeared into single digits if they even exist at all. So at 45 you do short some more and the stock doubles AGAIN, and your broker FORCES you to cover, because you have no more money in your account to secure the position.)

A put like the NTMD December 30s – selling for $8 when it was $7 ‘in the money’ – is one way to play a situation like this.

Another is to buy ‘out of the money’ puts with NO intrinsic value (the right to sell something for less than it’s worth has no intrinsic value) . . . but that, accordingly, cost much less.

Instead of paying $8 per share for a December $30 put (which is to say, $800 for one 100-share put), you might have paid $1 a share for a December $15 put – or even less for a put that had less time to run before it expired. If the stock never got below $15, and in fact went to $30, you’d lose your $1. But that’s a lot better than losing $8!

But what if the stock when to $16? The $8 you paid for a put giving you the right to sell the stock at $30 would be worth $14 (you’d buy it at $16 and sell it at $30 an instant later) . . . while the $1 you might have paid for the right to sell it at $15 would expire completely worthless. (And, knowing you, because they were just $1, you might have bought 8 of them and lost the full $800 anyway. Geez! What will I do with you?)

And, yes, you could short the stock to avoid paying a premium for the puts and then, more or less simultaneously, buy some ‘way out of the money calls’ as a way of limiting your loss, just in case. Short the stock at $23, say, but buy some calls for a relative pittance that give you the right to buy the stock at $30. So if it zooms to $90, your loss on the short position would be almost entirely balanced by the gain on your calls.

But this is what’s actually known (I think – I get confused) as ‘manufacturing a put.’ Right? It’s a short sale combined with a call, which gives you all the characteristics of a put.

And around and around.

So, no, all this is not ordinarily a good thing to dabble with.

But when you do decide it makes sense to dabble – as I thought it did with NTMD – you need to do it in away that fits your risk profile. Ordinarily, the simpler the better.

No one should short stocks who doesn’t truly know what he’s doing (which, even then, is no guarantee of success!). Buying puts is less crazy, but you should absolutely be prepared to lose every penny of your bet, because you frequently will.

I’d suggest holding onto one’s NTMD puts, even now that we have a good profit. But be prepared for spikes up in the price (like Friday’s) – and be prepared, really, to lose every penny of your bet, because (a) we could be wrong; or (b) we could be right and still lose everything if the stock doesn’t crater until after our puts expire.

 

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