Re: Bubble Boy.

Kragen Sitaker (kragen@pobox.com)
Sun, 9 May 1999 17:00:53 -0400 (EDT)

Gregory Alan Bolcer wrote:
> > Rimpinths himself has gone out of his way to short Microsoft, Intel,
> > Cisco, and Dell, and looking at the open "short interest" of these
> > companies as of April, he's not the only one:
> >
> > http://www.viwes.com/invest/shorts/top20/latest/pos.html
>
> Institutional investors and the companies themselves will keep running
> shorts to protect their stock holdings. They are cheap enough that you
> can get a far enough out of the money strike price that is essentially
> insurance. Any major loss of equity in the stock is made up
> in gains in the option. How far out you buy the options depends
> upon how much you are willing to lose. In short, the number of outstanding
> shorts is not a reliable metric for predicting stock prices.

You're thinking of puts, which are sell options, and are (as you say)
cheap and useful to protect your stock holdings, and essentially insurance.

Shorts are a different ballgame altogether; shorting is selling a stock
you don't own, hoping to buy it later at a better price and take home
the difference in your pocket. Shorting a stock means the amount of
money you lose is limited only by how much the stock rises. (The
amount of money you gain is limited by how much you sold the shorted
stock for.) It doesn't make sense to short a stock you hold, as far as
I can tell.

Whether or not it's a reliable metric for predicting stock prices, I
don't know. I'd be willing to bet on "no", because if you had a
reliable metric for predicting stock prices, you'd be very rich very
quickly, and as soon as you (or someone else who understood that
metric) controlled a significant amount of the money in the market, the
metric would no longer be reliable.

-- 
<kragen@pobox.com>       Kragen Sitaker     <http://www.pobox.com/~kragen/>
TurboLinux is outselling NT in Japan's retail software market 10 to 1,
so I hear. 
-- http://www.performancecomputing.com/opinions/unixriot/981218.shtml