Turning Stupidity into Cash - Round 3

This DISCLAIMER applies.

ATHEROGENICS
$15 January '07 PUT
BID: 4.20
ASK: 4.70

As a general rule, with but one exception (Viragen), I would never naked short biotech stocks. There is just no way of knowing who might or might not pull a rabbit out of the hat, regardless of how poorly managed the company's finances might be.

But buying puts has a very different risk profile than naked short selling. Even though both generate gains when the price of the stock in question declines, the puts present investors with the means to manage downside risk to capital. Wiping out with a put is to be expected from time to time and it's not the end of the world if a stock quadruples and the risk capital you commit to a put position disappears. It's a very different... potentially lethal... situation if you're holding a naked short position when a stock does that.

Atherogenics is, financially, in really bad shape. And, of course, there is the prerequisite group of investors out there blaming Atherogenics' problems on... you guessed it... naked short sellers.

So Atherogenics is a logical choice for a put position. However, that premium is pretty rich for a $13 stock. Once again, the smart money in the options pits seem to be telling us something.

We're listening.

POSITION SUMMARY
PRO: One of the ugliest balance sheets I have ever seen for a publicly traded company.
CON: Company has a good two year's worth of working capital. They won't need to raise money any time soon. Also, unlike so many other bogus "development stage" companies, Atherogenics is actually spending their money on R&D. 89% of their operating budget went to R&D over the past three years.

Turning Stupidity into Cash - Round 2

This DISCLAIMER applies.

NETFLIX
$25 January '07 PUT
BID: 4.60
ASK: 4.80

We were led to Overstock long ago by the antics of her loopy CEO. Now that we've confined ourselves to the world of stocks with listed options, it is unlikely that we will find many other companies with CEOs that behave like pink sheet/penny stock operators.

Just because we might not find another "Dr." Byrne in our quest for put candidates doesn't mean that we won't find groups of loopy shareholders convinced that "naked short sellers" are harming their investments and that the way to "fight back" is to loyally hold their shares, come what may, as the company spirals into the ground.

Netflix provides such an opportunity. The first warning sign that Netflix would be a good put candidate was the widely disseminated story within "Get Shorty" circles that David Patch had latched onto Netflix. As anyone who follows the "naked short seller" scam is well aware, David Patch is the kiss of Death for any company that attracts his attention.

There is a lot of stupid money following the "naked short seller" movement and some of that stupid money has found its way into Netflix shares. Our selection of Netflix as a put candidate is in no way an indication that we feel Netflix management is either incompetent or criminal. However, they operate in a business environment that has become extremely cut-throat. And while the use of the postal service may have been a great way to cut out overhead from the "physical retail floor" model of video rental, both models will eventually succumb to digital forms of delivery in the very near future.

POSITION SUMMARY
PRO: Absurd valuation, slowing growth, and stiff competition in a media delivery format that is technologically obsolete.
CON: Company actually has earnings. And while the valuation is silly, the company is in not in imminent danger of financial insolvency.

Turning Stupidity into Cash - Round 1

This DISCLAIMER applies.

OVERSTOCK
$20 January '07 PUT
BID: 3.50
ASK: 3.70

Because the small investor must rely upon the options pits in order to benefit from the "naked short seller" scam, a lot of worthy candidates must be excluded from consideration. There are no put options that trade on the pinkest of the pink sheet disasters nor will you find options listed for most of the trash on the OTCBB.

But one excellent candidate that does have listed options is Overstock. In many ways, Overstock, with its CEO Patrick Byrne doing his best immitation of Chris Farly from "Tommy Boy" (except for the part where "Tommy" actually manages to save the family business), is a "naked short seller" poster child. There's not a quarter that goes by where "Dr." Burn doesn't manage to find an opportunity to lash out at those evil "naked short sellers" who have somehow caused him to miss revenue targets, stifle Overstock's growth, and trashed the company's working capital situation.

Overstock is also a great example of the odd pricing we will find in the options pits. The guys in the options pits are a lot smarter than you and me. They don't fall for this "naked short seller" nonsense which is evidenced by the pricing you see for the puts of companies we will target.

Take a typical day in the pits with a typical company like, say, Walmart. Walmart trades this morning around $ 46. With the common trading at that price, we then check out the January '07 calls and puts for the $ 45 strike. The calls are priced 3.60/3.80 , the puts 1.85/1.95 . With most stocks, you will find that the options pricing shows a bias that suggests modest gains are to come.

Overstock's options pricing shows an interesting contrast to typical options pricing. With the common trading just under $ 21, the January '07 calls and puts for the $ 20 strike tell a much different story. The calls are priced 3.50/3.80 , the puts 3.50/3.70 . The sharpies in the options pits are in on the joke. They know that the "naked short seller" excuse is nothing more than a poor excuse for executive ineptitude and have priced their instruments accordingly.

Unfortunately, this means it will be more difficult for us to make money off of these puts than we could otherwise make if the options were priced like those for "normal" stocks. But take some comfort in knowing that the "smart" money has voiced its opinion in the options pits. "Smart" money doesn't always win, but there's worse things you can do with your speculative capital than to put it with the "smart" money.

POSITION SUMMARY
PRO: Decelerating growth, tenuous working capital situation. No ability to "brand" in a low-margin, cut-throat sector.
CON: "Fulfillment" business has relatively attractive margins and could be the focus of a shrewd restructuring.

Turning Stupidity into Cash

Over the years, we've made some decent coin taking positions against companies that blamed their problems on "naked short sellers". Unfortunately, it's something that 99% of the investment community can't do. Even though "naked short selling" is legal (despite what so many scammers would have you believe), it's a pain in the neck. The compliance issues are complicated, it requires a lot of capital, and the transactional expenses make it impractical for small blocks.

That doesn't mean that there aren't opportunities for smaller investors to take advantage of those companies OR investors that complain about "naked short selling". A good place for small investors to turn stupidity into cash is in the options pits. Buying puts on the shares of these companies gives investors an opportunity to profit when those stock valuations are completely unjustified by their fundamentals.

Buying put options entails a great deal of risk. You may lose all of your investment if the anticipated move in the underlying stock's price does not materialize.

The material contained within this blog is not intended to serve as investment advice. It is presented for informational purposes ONLY. By accessing this site, you agree to indemnify the blog manager and all entities responsible for its delivery to your internet device from any and all claims for losses or damages that you may incur while attempting to pursue the investment strategies discussed here.

The manager of this blog or the manager's associates MAY take, or MAY have ALREADY taken, positions in some OR all of the securities discussed on this site.

THE STRATEGIES DISCUSSED HERE WILL ENTAIL A GREAT DEAL OF FINANCIAL RISK FOR ANY INVESTOR THAT PURSUES THEM. PROCEED WITH CAUTION. IF YOU DO NOT COMPLETELY UNDERSTAND THE RISKS INVOLVED, THEN GO AWAY.

The information here is provided to you free of cost. However, if you benefit from the information presented on this blog, I would ask you to consider a donation to the following charity:

All Faiths Food Bank
717 Cattleman Road
Sarasota, FL 34232

(Please put "Naked Short Selling Lie" in the Memo field of your check.)

NOTE: I have NO affiliation with All Faiths Food Bank beyond seeing them as a worthwhile charity that serves the needy in this community. Don't hassle them if you hate what I have to say about your stock. They have one of the most impressive ratios of services provided to funds raised that I have seen.

Time to find some candidates...