Twitter now worth over $40 billion | Hacker News Reader

Twitter now worth over $40 billion

finance.yahoo.com

5 pointsadventured5 comments

Yea so much for the inevitable 'it's a bubble' arguments. Stocks like Facebook, Linkedin, Zillow, and Trulia that the pundits called 'obvious' bubbles are trading 50% or higher than their IPO price. This throws more water on Garry Shiller's argument that bubbles can be predicted or that betting against 'obvious' bubbles is profitable. Only in hindsight can we proclaim something a bubble. Even if an overvalued stock does fall you can still lose all your money shorting if you get a margin call, because the price can rise much longer than you can remain solvent as attributed to John Maynard Keynes.

Personally, I'm long Twitter by selling covered calls. Pretty much if Twitter stock stays above $70 I will make $10k by the end of January.

I'm a bit of a noob when it comes to this kind if thing, but would you care to explain how you go about "selling covered calls".

The how, where, why and the what's of this kind of financial transaction would be really interesting to know.

Let's say I sell you an option to buy (from me) a share of TWTR at $100 at any time through the end of January. I have just sold you a call option.

If I already own a share of TWTR that is not tied up in another contract, the call is considered covered (meaning I would not have to go out and find a share to buy if you exercised the option).

More: https://en.wikipedia.org/wiki/Covered_call

"Selling a covered call" is when you own the stock and then write/sell a call, using the stock you own as collateral.

For example, TWTR is currently $73/share. Suppose you own 100 shares of TWTR. The March 2014 85 strike call has a bid of $7.90. Suppose you sell one 85 strike TWTR call for $7.90. (1 call equals 100 shares.) You immediately collect $790 in premium. Your cost basis in your TWTR shares is reduced by $7.90 per share. (for capital gains tax purposes)

If TWTR is above $85/share in mid-March 2014, whoever owns that call option will exercise it. You sold your TWTR shares for $85/share, even if the actual price is much higher. You effectively sold it for $92.90 per share, because you also collected $7.90 when you wrote the call.

If TWTR is below $85/share in mid-March 2014, the call option expires worthless, and you keep your TWTR shares and your $7.90.

It's a covered call, you already own the shares, so your loss is limited if TWTR skyrockets. If TWTR goes to $200/share, you lose big on the call, but that is offset by the shares you own.

Superficially, this seems like a good trade. You get $7.90 now, and if TWTR goes up, you sell at a price you're happy with.

However, this is AN IDIOT TRADE. You might as well just write Goldman Sachs a check directly if you're going to do such stupid things. Why? In the Black-Scholes formula for pricing options, the "average gain" of stock equals the risk-free rate. However, on average, stocks go up MUCH MORE than the risk-free rate. When you write a covered call, you're giving up all the upside.

On average, the stock goes up by more then the premium you get for writing the call, making this an idiot trade.

The whole point of being in the stock market is that you make good picks and get a 100% or better gain. You give up that upside when you write the covered call. The premium you receive for writing the call does not offset (on average) the missed gains.

When you write the covered call, you still have the risk that the bubble pops and TWTR crashes. But, you miss out on all the potential upside if there are many greater fools willing to buy it later.

And Yet, Apple is only worth $500B, at the same valuation Apple would have worth over $20 Trillion.

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