5 ms·

I was reading r/TeslaMotors that day and a long made the astute observation that shorting the stock after Musk's announcement when it hit around $380 was the mo

by danso 8y ago

I was reading r/TeslaMotors that day and a long made the astute observation that shorting the stock after Musk's announcement when it hit around $380 was the most logical thing to do, because at most you'd be out 10% if Musk were telling the truth. If I had a trading account I think I might have gone for that.

whatok 8y ago
Max loss being 10% is absolutely not accurate at all in that scenario. Taking the company private would still be up to a shareholder vote and shareholders could determine that the price offered was not sufficient. In that case, there are a lot of ways the stock could trade above the takeout price.
- danso 8y ago
  Isn't it possible to set the short order at a max limit to cut your losses? (this shows how little I know about having a trading account)
  - whatok 8y ago
    This might help: https://www.investopedia.com/articles/active-trading/091813/which-order-use-stoploss-or-stoplimit-orders.asp https://www.investopedia.com/articles/active-trading/091813/... The problem with stops is that you run the risk of the price gapping up or down and your stop getting filled at a much different price than expected.
    - howard941 8y ago
      I'm an experienced trader in the sense that I've had only bad experiences trading. Thinking a stop loss order would help I (and the order) failed to account for one of those flash crashes that happen for no obvious reason other than to trigger execution of stopped orders.
      - wjnc 8y ago
        With leveraged products (like rolling turbos [1]), that risk is usually on the offering institution? I dabbled in those a few times when pretty sure (or full) of myself. There are no margin calls in turbos, you add leverage to your liking (x 2, x 5, x 10, ..) and you pay a hefty interest on your leverage (say 7%). Your exposure is exactly the price you bought for. [1] https://en.wikipedia.org/wiki/Turbo_(finance) https://en.wikipedia.org/wiki/Turbo_(finance)
        howard941 8y ago
        Unfortunately I was long Kraft (the food co), completely unleveraged, and got taken out at a 15% loss thanks to a flash crash-induced stop loss. It taught me a lesson that only losing real money teaches.
  - MichaelApproved 8y ago
    The only reliable way to limit losses would be using options.
  - defen 8y ago
    Sell short and buy a corresponding (shares short / 100) number of call options at $420 strike (which, in theory, if Musk were telling the truth, should essentially be worthless but in practice will come with some amount of premium). That way you have a guaranteed exit at $420/share + option premium paid. You could reduce your option premium cost while slightly increasing your max loss if you went with $430 calls or whatever.
    - MichaelApproved 8y ago
      Why not just buy puts and simplify the trade?
      - defen 8y ago
        That could work too; without seeing the numbers it's hard to say. For example you might have a higher chance of losing your money due to theta decay depending on how far out you're buying. And the premium on the puts is going to be substantially higher than on the defensive calls unless you go significantly OTM.
mandeepj 8y ago
> If I had a trading account I think I might have gone for that. It does not take that long to open a trading account or you could have taken one of your friends help to execute this trade
- danso 8y ago
  Well, as others have pointed out, I might have been in for a bigger loss based on my assumptions about shorting :). I mean, had Musk been telling the truth.
- RussianCow 8y ago
  Funding an account usually takes a few business days unless you use a wire transfer, which has a cost. By the time you open and fund the account, it may be too late to execute the trade.
dyu 8y ago
You can do a straddle and get the best of both sides.

by danso 8y ago

whatok 8y ago

Max loss being 10% is absolutely not accurate at all in that scenario. Taking the company private would still be up to a shareholder vote and shareholders could determine that the price offered was not sufficient. In that case, there are a lot of ways the stock could trade above the takeout price.

danso 8y ago
Isn't it possible to set the short order at a max limit to cut your losses? (this shows how little I know about having a trading account)
- whatok 8y ago
  This might help: https://www.investopedia.com/articles/active-trading/091813/which-order-use-stoploss-or-stoplimit-orders.asp https://www.investopedia.com/articles/active-trading/091813/... The problem with stops is that you run the risk of the price gapping up or down and your stop getting filled at a much different price than expected.
  - howard941 8y ago
    I'm an experienced trader in the sense that I've had only bad experiences trading. Thinking a stop loss order would help I (and the order) failed to account for one of those flash crashes that happen for no obvious reason other than to trigger execution of stopped orders.
    - wjnc 8y ago
      With leveraged products (like rolling turbos [1]), that risk is usually on the offering institution? I dabbled in those a few times when pretty sure (or full) of myself. There are no margin calls in turbos, you add leverage to your liking (x 2, x 5, x 10, ..) and you pay a hefty interest on your leverage (say 7%). Your exposure is exactly the price you bought for. [1] https://en.wikipedia.org/wiki/Turbo_(finance) https://en.wikipedia.org/wiki/Turbo_(finance)
      - howard941 8y ago
        Unfortunately I was long Kraft (the food co), completely unleveraged, and got taken out at a 15% loss thanks to a flash crash-induced stop loss. It taught me a lesson that only losing real money teaches.
- MichaelApproved 8y ago
  The only reliable way to limit losses would be using options.
- defen 8y ago
  Sell short and buy a corresponding (shares short / 100) number of call options at $420 strike (which, in theory, if Musk were telling the truth, should essentially be worthless but in practice will come with some amount of premium). That way you have a guaranteed exit at $420/share + option premium paid. You could reduce your option premium cost while slightly increasing your max loss if you went with $430 calls or whatever.
  - MichaelApproved 8y ago
    Why not just buy puts and simplify the trade?
    - defen 8y ago
      That could work too; without seeing the numbers it's hard to say. For example you might have a higher chance of losing your money due to theta decay depending on how far out you're buying. And the premium on the puts is going to be substantially higher than on the defensive calls unless you go significantly OTM.

mandeepj 8y ago

> If I had a trading account I think I might have gone for that. It does not take that long to open a trading account or you could have taken one of your friends help to execute this trade

danso 8y ago
Well, as others have pointed out, I might have been in for a bigger loss based on my assumptions about shorting :). I mean, had Musk been telling the truth.
RussianCow 8y ago
Funding an account usually takes a few business days unless you use a wire transfer, which has a cost. By the time you open and fund the account, it may be too late to execute the trade.

dyu 8y ago

You can do a straddle and get the best of both sides.