3 ms·

Why not just buy puts on it?

• dia80 15y ago
  They are extremely expensive reflecting the cost of borrowing the stock. If the weren't you could buy the stock, lend it out and then buy a put and sell call to make a 'synthetic short' and pocket a risk free profit. No free lunches.
  • nowarninglabel 15y ago
    Thank you for the follow-up, sorry if too many questions, but one more. If I hold the general consensus opinion here that Groupon is heading to insolvency, and let's say it will be insolvent by January 2013, is it cheaper then to attempt to acquire Groupon stock to short it on margin than to buy a January 2013 put, even if your margin is running at 60%?
    • dia80 15y ago
      You can buy a Jan 13 $10 put for $2.05 so you have an upside of $7.95, just under 4:1 payoff in the event of a proper bankruptcy. That's not a lot so you can see a fair chance of disaster is already priced in. As a casual investor the option probably wins because you can sleep easier at night knowing that if GroupOn announce a cure for cancer you are only losing the $2.
      • nowarninglabel 15y ago
        Thank you, I was able to easily grok what you are saying, I was never thinking of it before in terms of 4:1 payoff, but that makes sense.
  • antr 15y ago
    Puts are expensive because the cost of borrowing? You are mixing two different instruments. Borrowing occurs when you short NOT when you buy puts. Puts are expensive because of the stock's volatility (and exercise price). The higher the volatility, the more expensive the option (call/put) is. Just check the math of the Black-Scholes options pricing model.