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Post by mnkdfan on Mar 1, 2014 1:14:44 GMT -5
ALCC, I am no options expert but will share my simple thought with you. Let's assume you have $12K to invest and the stock is at $6.00. You set aside $6K and short 1000 shares. Buy Apr 19th call, as an example, at about $2.00/share with your other $6K to control 3K shares (can leverage even more if you choose to buy 10.00 strike for 0.73c/sh). Now, say the stock goes to $10.00, you'd loose $4k covering the 1K shares shorted at $6.00. However, you would make roughly $12K with your options ($4x3000). I know it does not quite move 1 for 1 but you get the picture. The net gain would be $8K (12K-4K).
If the stock tanks to $2.00, you'd would make $4K with the 1000 shares shorted at $6.00 but would loose everything in the option $6K for a net loss of $2K. Thus it's a potential gain of $8K vs. loss of $2K, 4:1 ratio. This is a good hedge if you are long on the stock. One very simple example but I am sure more savvy options players will have many other approach.
Do you agree?
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Post by babaoriley on Mar 1, 2014 1:15:00 GMT -5
mnkdfan, those shorts back in October may have covered, then re-shorted later, or never come back. The current short interest could be held by entirely different people. There are many, many traders who make their living exclusively by shorting biotechs, and this one has more action than any I can remember over the years. Mnkd has been an option players dream, with lots of scheduled events, and good premiums along the way.
Given what I've seen over the past ten years or whatever it's been, the current activity is not surprising to me. The current shorts will get out, likely starting right after a positive AdCom (they may well stick around if AdCom is perceived as negative). A positive AdCom will bring with it so many articles warning longs of the "real" problem with MNKD - no partner cuz no market! And of course, there will be reminders how the FDA often goes contra AdCom, etc., etc. And, if there's a pop in the stock price on April 2, they will be shorting away about an hour after opening, and hoping for what I believe (and they believe and hope) will be a temporary retracement, providing them with some profits with respect to their most recently opened short positions.
You understand, for most retail investors, none of this has anything to do with diabetes, or inhaled insulin, Dreamboats, etc., it's all about the action.
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Post by mnkdfan on Mar 1, 2014 1:30:26 GMT -5
You're right Baba but if the committee is positive and the FDA approves the drug, I am confident the PPS will rise. At the end of the day the shorts will have to cover at some point and like you say it would just be a temporary retracement. I am of the belief that the shorts could be part of the hedge strategy in that as they go to cover the PPS will go up along with the call options they have bought. Thus, short covering loss can be offset by the call option gains a little more.
Because I am in this for the long haul, I don't mind the temporary retracement. My broker friend tells me on days like today that it's a healthy pull back for consolidation especially given MNKD run the last two weeks. Today's pull back seems to be across all biotech sector and to be honest, I think MNKD held up pretty well.
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Post by alcc on Mar 1, 2014 5:48:56 GMT -5
Fan,
Your math is way wrong. Were it that simple to make money.
Let's go over your scenario. You sold 1000 shares short at $6 and bought 3000 $6 calls at $2. Your net cash out = 0.
If the shares go to $10, you pay $10,000 (1000 x $10) to cover your short. Your calls would be worth $12,000 (3000 x $4). So your net gain is therefore $2000. [Note: your mistake in your calculation is you neglected to account for the $6000 cost of your calls].
If the stock goes to $2, you cover your shorts at a cost of $2000 (1000 x $2). Your calls expire worthless. You are correct that your net loss is $2000.
Your endpoint gain/loss ratio is 1:1. Not 4:1. Same ratio as had you simply bought 1000 shares at $6. Except in that case your max gain (and max loss) would have been double at $4,000.
Note, however, your max loss is not $2000 (at $2) but $6000 (at $6, when your calls are worthless and you need to pay $6000 to cover your short). Thus, within your endpoints, the best case gain is $2000, but worst case loss is $6000. A 1:3 ratio. Now one could argue that, in this case, the shares will either pop or drop, but unlikely to stay at $6. I agree we can take that into account.
It is easy to plot your strategy's gain v. price. Normalized to 1 share short and 3 calls long: at $0, your gain is 0. This line then declines with a slope of -1 to $6, where your gain is -$6. This is your inflection point. From here, the line rises with a slope of +2, crossing the x-axis (break-even) at $9. At $10, your gain is at +$2, at $15, +$12, at $20, +$22 etc.
This is not a hedge. More like a zero-cost leveraged long play. Maybe some longs use this strategy, thus accounting for some of the short shares. I suppose that possible.
Personally, if I were to hedge the calls, I would buy out of money (say $2, for $0.33) puts. The area of the loss (in the plot) is larger but the upside line rises with a slope of +3 instead of +2. At $15, my gain would be +$21, at $20, +$35. Or I would do a vertical spread, which gives an even better leverage, altho that caps my gain.
Trust I am clear enough.
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Post by ezrasfund on Mar 1, 2014 8:42:13 GMT -5
The original question was whether there are really 50+ million shares "naked" short. The graph of that strategy must look pretty ugly LOL. It is hard to believe that so much money is unhedged and betting MNKD will fail. The potential losses could be huge if the stock price spiked. As mentioned above these shares could have been covered at under $3 for months. But if you had bought LEAPs when the stock was at $3 you'd be feeling pretty good right now and maybe not inclined to cover any short shares just yet. As tricky as the hedging strategy may be, the idea of a naked short on MNKD seems to make less sense. Another aspect of the hedged strategy is that the stampede to cover will help the stock price to spike beyond any sensible valuation. Sophisticated players bank on being able to move very quickly, and short covering quickly on good news and then riding the other side of the trade could be profitable.
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Post by spiro on Mar 1, 2014 9:52:01 GMT -5
Disclosure, I hate shorts.
Without doubt there is considerable rotation in and out of the short position. But that doesn't make the shorts the winners all of the time. Because MNKD options have held such huge premiums the last 2 years or so, the most popular call options $5 and $7 have been expiring worthless, month after month. The real winners have been the institutions that have been selling the shorts these overpriced options. Taking a look at MNKD share prices the previous 12 months will show that the 1st 6 months MNKD's share price was below $5. The next 3 months over $6 followed by 3 months around $5. And now we have been rallying from $5 to over $6 during the last month. Because I am so dumb, I have not been been selling these covered calls the last 2 years. One thing is certain, the shorts have owned a lot of those losing options that have been expiring worthless, month after month. But you know, riverboat gamblers don't know when to quit. Shorting is there dope here. I do not know how this thing will end up, but I damn sure know the facts and truth are on my side.
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Post by mnkdfan on Mar 1, 2014 10:56:36 GMT -5
ALCC, Your below example assumes there's zero intrinsic option value left at the time you sell the options:
"If the shares go to $10, you pay $10,000 (1000 x $10) to cover your short. Your calls would be worth $12,000 (3000 x $4). So your net gain is therefore $2000. [Note: your mistake in your calculation is you neglected to account for the $6000 cost of your calls]."
I used the short time expiration for a quick example but in all likely hood I should have used the 1/2015 $7 or June $6.00 strike as an example so that the option intrinsic value is still remaining. Thus your calculation for the option value when the stock price hit $10 on say April 16 would be greater than just $4x3000=12K but more like ($4-stock gained+$2.00 initial intrinsic value) $6x3000=18K. The net gain would be $8K after deducting your $10 short loss. I realized that you will loose some intrinsic value depending on how much time is left plus you don't get the full $4.00 stock gained in gain with option but the leverage component is the point. I own a couple hundred contracts of the $7.00 1/2015 and that seems to be the pattern.
Your example is correct if the stock price is $10 on the day the option expires. I was not clear in my example for using a shorter expiration time line. I would think the hedgers would likely buy the 1/2015 calls for leveraging the gains.
I could be wrong and Spiro experience would suggest that these short river gamblers are much more aggressive than I am.
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Post by alcc on Mar 1, 2014 13:02:48 GMT -5
Fan: As I said before, options pricing is not called rocket science for nothing. Your Jan '15 $7 closed at $2.42 ask. Yes, you will have some residual value if you close those out in April. But then you would have to short more to cover your cost, your max loss will be higher, and your break-even will be higher. The graph shifts downward and to the right. And do you cover and close in April, post FDA? Or hold to Jan '15?
To me, you (not you personally) have to make up your mind whether you are long or short. If you decide you want to be long, but want to hedge, I submit the better and commonly used strategy would be to pay up and buy protective puts or use vertical spreads. If you decide you want to be short, then just... short. Your so-called hedge(which it is not, technically) is what I consider as in the "if it sounds too good..." category. Do you really think you can find an angle/edge on the market makers?
Spiro: I, too, hate shorts. Same reason why I also hate gold bugs, the ultimate shorts. It's one thing to hedge; another to wish for bad stuff to happen. If I don't believe in a company, I don't buy the stock. If I don't like the macro picture, I stay on the sideline. Trying to profit from bad things happening when real people get hurt is too much for my conscience. There are other ways to make money, imho. Re your comment about market makers being the real winners, of course they are. They are almost always hedged. Plus most options expire worthless. Plus, spread over many stocks, the risk of a lop-sided move is de minimus. Now, when they are not adequately hedged and a lop-sided event happens, as in 2008, they get cleaned out... or bailed out!
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Post by Chris on Mar 1, 2014 13:58:59 GMT -5
"I, too, hate shorts. Same reason why I also hate gold bugs, the ultimate shorts. It's one thing to hedge; another to wish for bad stuff to happen. If I don't believe in a company, I don't buy the stock. If I don't like the macro picture, I stay on the sideline. Trying to profit from bad things happening when real people get hurt is too much for my conscience. There are other ways to make money, imho. "
Nice
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Post by babaoriley on Mar 1, 2014 15:00:17 GMT -5
Chris, I used to think that way (the sentiment from alcc that you quoted), I stopped about 7 or 8 years ago. It was the biotech sector that made me change. I followed a few with what would have been wonderful cures/treatments for serious diseases, and most failed. Just because the result, if successful, would be great for most everyone, doesn't mean the particular company is "good" - in fact, they may be not so good, and they really have no chance of bringing their products to approval. If I think markets are going bad, then I play short, normally by selling uncovered calls. I'm not going to hell for that - perhaps on account of many other things.
I know a lot of gold bugs, they are a strident sort, for sure. And many are very sure that all is going down the toilet, except precious metals. I agree with some of their points, and the gold rise from 2000 to 2012 or so was breathtaking and so consistent. But the bugs tend to have tunnel vision, and often can only see their point of view, and have disdain for those that disagree (maybe a little like long fans on biotech???). I sure hope things never even get half as bad as the bugs think they will, it would be awful.
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Post by Chris on Mar 1, 2014 20:30:49 GMT -5
I'm with you Baba, I just thought that was nice of him/her to say.
I don't ever directly invest in a company because I think they have good intentions and it's what I agree with and relate too (cause wise).
Fundamentals and technical analysis rule when I pick.
In the case of biotech it's specifically upcoming binary events, good buy out or partnership potential, an unmet and innovate drug and/or device and market psychology and expectation that I evaluate.
By the way I know we both buy gold hahaha so I grinned when I saw the gold bug comment.
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