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Comment by eru | Hacker News Reader

Do you hold a short position?

Not everyone invests. I recall some years ago when I was living in a bit of a moral vacuum. I was at UofT and I spent all of my spare time playing bridge, poker, and backgammon, for as much money as possible.

One night I had a chance to play an extremely plump pigeon, I think they call them "whales" today. He asked for various handicaps to narrow my edge, and we worked out something I thought was going to make me a lot of money. He then dropped the big kicker: He wanted to play for extremely high stakes, enough that if he got hot, he would bankrupt me.

Naturally, this dismayed me. Although I thought I could keep my cool and not "steam," I knew that being the better player, I wanted the chance to let the odds play themselves out, not subject my self to the possibility of a bad swing.

So I sought out a friend who had an extremely large and dependable cash flow. Would he back me in exchange for a share of the profits? We both knew I was going to win.

He turned the deal down. "I only bet on myself," he said. I was incredulous. Why turn down an extremely lucrative business opportunity? "I like knowing that I made my own money," he said. He didn't see investing in me as being the same kind of thing as running his various schemes and dealings where he had his own hands on the levers of commerce.

I'm not saying it's a better thing, but some people simply aren't that interested in investing, they like to bet on themselves.

I tell folks I either invest in the broadest possible market -- namely index funds -- or the narrowest: me.

I realize this is likely a tongue-in-cheek response, but I wouldn't have touched (and didn't) the FB IPO from either a long or short position. Too much emotion and too much hype.

Even if I believed the stock was grossly over priced it would have been silly to take a short position because the stock was and is quite capable of spiking hugely. In this case you might be correct about the value of the stock but can still be taken out the market due to "irrational" movements in the price.

The "real" value of FB starts becoming "realistic" somewhere below 10 and unless FB announce some major improvement in revenue generation I just cannot see FB going anywhere but south in the short term.

The market can stay irrational longer than you can stay solvent.

I shorted from 31.50 down to 27 .. wish I held onto the position ...

By what percentage did you increase your initial investment? I'm just curious about trading options in general. Would be interesting to learn how holding onto your postition for that time period paid off.

I shorted the equity directly.

The main costs are:

    - Transaction and Margin costs (those are generally 1 cent per share per side, roughly .06%)
    - Borrow costs (For that trade it was 30% annualized.  I held it for 6 days so its .7%)

So the cost to the trade was .76%. The gross return (since you calculate returns relative to the starting point) is (31.5 - 27) / 31.6 = 14.28% and the net return is 13.53%

Note that I didnt short as much as I could have -- obviously the return would be higher if I borrowed extra money to short.

Interesting. +1 for sharing actual numbers as that helps the learning process along quite a bit imo.

Would it make what he said less true? Daily updates on FB's stock are boring.

Lots of articles on the front page are, in my opinion, boring. My solution is to not click on them.

I happen to find media and public sentiment on the biggest, most hyped IPO of the decade (ever?) to be fascinating.

I think the comment was more about his stock prediction. It's very easy to make confident claims about the performance of a stock when you're not invested in it yourself. Financial opinions would be a lot more interesting if they were only given by people who followed their own advice to the letter.

Just because you believe a stock will eventually be at a lower price than it currently is doesn't mean it makes sense to short it unless you also think you can time the drop perfectly, and if you think that you're a fool.

The virtually unlimited downside of shorting is a lot of risk that has to be factored into any decision and thus shorting isn't to be taken lightly even if you're pretty damn sure of your opinion.

> doesn't mean it makes sense to short it unless you also think you can time the drop perfectly,

With the right options, you don't have to time it perfectly. Just good enough.

You can limit the risk of shorting relatively cheaply by buying way out-of-the-money call options.

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