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Ask HN: How would you bet on an imminent (3-6 month) tech bubble burst?

7 points by roymurdock 12y ago

Caveats: - With less than $50k - In such a way that your risk is somewhat hedged (no straight shorting stocks)

anigbrowl 12y ago
Put options allow you to sell at a specified strike priceat some future date. If you expect stocks in that sector to fall, you buy a put option (I think for about 5% of the strike price) and wait. If the stocks are above the strike price on that date, then your option is worthless and you lose the money you spent because you made a bad decision. If stocks are below the strike price (by an amount equal to the cost of the option + transaction fees - say, 7.5%) then you buy the now-cheap stock on the open market, sell it for the strike price to the now sad-faced counterparty, and pocket the difference. Alternatively you could sell short but hedge your bet with a call option, which allows you to buy at a particular price in order to cover your short, thus limiting your downside risk. I'm no financial adviser, though. You should really deal with a broker for this - explain your expectation of market behavior (eg a 50% decline in stock value across the sector within 6 months) and then ask the broker how to maximize your upside and minimize your exposure up to the amount of money you are willing to lose if you are wrong. Don't forget the old maxim 'the market can remain irrational for longer than you can remain solvent' - place your bet and then mentally write it off as a loss, not an asset. If it turns out you bought a golden ticket then hooray, but timing the market is essentially a big gamble and gamblers lose more often than they win. That strikes me as another reason to use a broker; having someone else doing the execution lowers the temptation to go double-or-nothing in a surge of adrenalin. If the market behaves in accordance with your theory, you get a nice check in the mail, if not you spend some time regretting the other ways you could have spent the money but without the nausea that follows an adrenalin rush.
gesman 12y ago
Wait until everyone believe that it's a bubble. Then wait until everyone got disappointed that bubble is no bursting. Then wait until everyone affirms that the bubble will never burst and it's the "new economy" now. Then buy ITM OEX PUT's with 1 yr ahead expiration date.
PhantomGremlin 12y ago
Be really really really careful about how you place your bets. I think it's dangerous to bet against an entire sector. "Tech" companies are so varied. Back in 2000 a previous bubble burst. AKA the "dotcom crash". It had lots of companies that were truly absurd. E.g. pets.com thought it could become profitable by offering free shipping on heavy bags of dogfood.[1] Now we still have absurd valuations. E.g. Mark Zuckerberg saw nothing wrong with spending $19 billion of his shareholders' money on WhatsApp, a company that had IIRC somewhere around $30 million in revenue. However, there's a big difference. The rest of Facebook is quite profitable. It might be somewhat overvalued, but it's a real company. It might eventually go the way of MySpace, but I wouldn't bet against Facebook right now. There's a very important saying on Wall Street: never short a company based (solely) on valuation Okay, you specifically said you didn't want to "short". So let's just rephrase it: Don't bet against a successful, growing company solely because you think it's overvalued. Try to find companies that are on the way down. E.g.: Are their revenues falling? Is their core business model threatened? Are there strong up-and-coming competitors? Do they have a moron for a CEO? Are they an outright fraud? I agree with your general opinion. I think there's a lot of froth in some current tech company valuations. I think the "bubble" will burst one of these days. But right now I'm not betting any of my money on the "tech bubble burst" I see coming. Because there's yet another very important saying on Wall Street, attributed to John Maynard Keynes:[2] Markets can stay irrational longer than you can stay solvent Good luck! [1] https://en.wikipedia.org/wiki/Pets.com https://en.wikipedia.org/wiki/Pets.com [2] https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis
deleted 12y ago
[deleted]
MichaelCrawford 12y ago
I think it will take long than that, maybe two years. Look at all the startups that are "X for Uber". When they go public without any concept as to how to profit, that is when it will burst. I knew when the dot-com crash would happen about eight months before it actually did: I read a Reuters article about how all the business plans sent to Page Mill Road, Palo Alto VCs were for companies that intended to cash out by going public, without even attempting to produce anything of value to anyone.

7 points by roymurdock 12y ago

Caveats: - With less than $50k - In such a way that your risk is somewhat hedged (no straight shorting stocks)

Put options allow you to sell at a specified strike priceat some future date. If you expect stocks in that sector to fall, you buy a put option (I think for about 5% of the strike price) and wait. If the stocks are above the strike price on that date, then your option is worthless and you lose the money you spent because you made a bad decision. If stocks are below the strike price (by an amount equal to the cost of the option + transaction fees - say, 7.5%) then you buy the now-cheap stock on the open market, sell it for the strike price to the now sad-faced counterparty, and pocket the difference. Alternatively you could sell short but hedge your bet with a call option, which allows you to buy at a particular price in order to cover your short, thus limiting your downside risk. I'm no financial adviser, though. You should really deal with a broker for this - explain your expectation of market behavior (eg a 50% decline in stock value across the sector within 6 months) and then ask the broker how to maximize your upside and minimize your exposure up to the amount of money you are willing to lose if you are wrong. Don't forget the old maxim 'the market can remain irrational for longer than you can remain solvent' - place your bet and then mentally write it off as a loss, not an asset. If it turns out you bought a golden ticket then hooray, but timing the market is essentially a big gamble and gamblers lose more often than they win. That strikes me as another reason to use a broker; having someone else doing the execution lowers the temptation to go double-or-nothing in a surge of adrenalin. If the market behaves in accordance with your theory, you get a nice check in the mail, if not you spend some time regretting the other ways you could have spent the money but without the nausea that follows an adrenalin rush.

gesman 12y ago

Wait until everyone believe that it's a bubble. Then wait until everyone got disappointed that bubble is no bursting. Then wait until everyone affirms that the bubble will never burst and it's the "new economy" now. Then buy ITM OEX PUT's with 1 yr ahead expiration date.

PhantomGremlin 12y ago

Be really really really careful about how you place your bets. I think it's dangerous to bet against an entire sector. "Tech" companies are so varied. Back in 2000 a previous bubble burst. AKA the "dotcom crash". It had lots of companies that were truly absurd. E.g. pets.com thought it could become profitable by offering free shipping on heavy bags of dogfood.[1] Now we still have absurd valuations. E.g. Mark Zuckerberg saw nothing wrong with spending $19 billion of his shareholders' money on WhatsApp, a company that had IIRC somewhere around $30 million in revenue. However, there's a big difference. The rest of Facebook is quite profitable. It might be somewhat overvalued, but it's a real company. It might eventually go the way of MySpace, but I wouldn't bet against Facebook right now. There's a very important saying on Wall Street: never short a company based (solely) on valuation Okay, you specifically said you didn't want to "short". So let's just rephrase it: Don't bet against a successful, growing company solely because you think it's overvalued. Try to find companies that are on the way down. E.g.: Are their revenues falling? Is their core business model threatened? Are there strong up-and-coming competitors? Do they have a moron for a CEO? Are they an outright fraud? I agree with your general opinion. I think there's a lot of froth in some current tech company valuations. I think the "bubble" will burst one of these days. But right now I'm not betting any of my money on the "tech bubble burst" I see coming. Because there's yet another very important saying on Wall Street, attributed to John Maynard Keynes:[2] Markets can stay irrational longer than you can stay solvent Good luck! [1] https://en.wikipedia.org/wiki/Pets.com https://en.wikipedia.org/wiki/Pets.com [2] https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis

deleted 12y ago

[deleted]

MichaelCrawford 12y ago

I think it will take long than that, maybe two years. Look at all the startups that are "X for Uber". When they go public without any concept as to how to profit, that is when it will burst. I knew when the dot-com crash would happen about eight months before it actually did: I read a Reuters article about how all the business plans sent to Page Mill Road, Palo Alto VCs were for companies that intended to cash out by going public, without even attempting to produce anything of value to anyone.