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Put candidates for Bubble Stocks


bizaro86
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Last year around this time I started getting antsy about the market valuation and bought puts on some well thought of companies that had relatively high financial leverage. That worked out ok for a completely different reason than I thought (although in hindsight Clorox was a bad pick...) Anyway, I'm getting that same antsy-about-the-market feeling, and I'm looking to express it with puts on companies that have high leverage to the current r/wallstreetbets style insanity.

 

I'd be very interested in hearing what other people are thinking on this, and if anyone has ideas for things you've come across that have upcoming lockups, etc. In the interest of adding value and not just taking, here is what I have so far:

 

ARKG - This is the Ark genomics fund. I'm sure some of these firms are really great. But I think if the bubble pops all the ARK funds will get killed. They have reflexivity as well, because outflows will put pressure on the holdings they need to sell, lowering their price, causing more outflows.

ARKK - same thesis as above for their diversified ETF

DASH - these guys deliver food. Some day COVID will end, and with it the huge tailwind. Combine that with a high-competition business, and I think their bubble gets popped. Obviously its up huge recently. Recent IPO, so VCs exiting once their lockup ends is a potential catalyst here.

LMND - fancy online insurance co. I think they'll probably get killed at some point on claims, as I doubt their G&A is actually that much cheaper. Another recent IPO.

NIO - Chinese electric cars. Valuation is very high.

TSLA - American electric cars. Valuation is very high.

SPAK - combination of post-deal SPAKs. This is probably my favorite of the bunch, because someone has a plan to aggregate the future issuances of crap for me. The SPAC bubble means the quality of SPAC deals will go way down, and the promote already makes post-deal SPACs a negative expected value game. Options here only go out to August, unfortunately, but they aren't that expensive compared to some of this stuff.

GME - added this today on the short squeeze. Because this business isn't very good and the short squeeze won't last forever.

 

On the risk side, you need to be right on timing and valuation. The puts on this stuff are all very expensive (maybe there is a bubble in puts on bubble stocks?!?!) I've allocated about 4% to this theme so far, and am adding everyday. I have the strikes and expirations staggered, which is why I didn't list them, as there are lots. Generally all very far out of the money with expirations ranging from May 2021 to Dec 2022. If this bubble keeps going for a whole year more I'm looking at a total loss on that percentage of my portfolio, which is acceptable. If there is a big crash, probably a 5X gain on it. I like the optionality of big gains at the bottom, because it's likely that I'd be able to re-deploy those gains into beaten down stuff at the bottom.

 

I'd be very interested in comments, ideas, and especially explanations of why I'm going to lose all my money.

 

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I suppose the most obvious starting point is Keynes: 'the markets can remain irrational longer than you can remain solvent.'

 

It's not much help, but I'd suggest that you are the only person who know if you're capable of doing it.  It seems that Gregmal can trade Shorts.  I absolutely can't.  I'd say very few people can, so you need to be confident.

 

I agree that you've put a good Short-able list together, but I've just seen so many 'obvious' shorts go wrong over the years.

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Thats a good component of my short/hedge basket. I'd add ZM and BYND although BYND Ive covered a little bit as Impossible is garnering a $4B valuation in private rounds, which if you translate that to a public valuation, doesnt make BYND seem as egregious. Although I still think its egregious, I'd just be mindful of what that could imply as far as short/intermediate downside may be.

 

Others, NVAX, FCEL, TLMD, JKS, FEYE and maybe..although I have some hesitations, CVNA and PTON.

 

And, no, you never lose all your money if you came prepared. If you cant take a short going against you 5-10x you shouldn't be shorting or are doing it wrong. I also think outright shorting to make money isnt ideal 95% of the time. It's more an attractive way to offset some risks being long if you pair/size it properly. 10 up, 3 down is still +7. The attractiveness is that if you are somewhat in the same ballpark from a timing perspective, both sides can work out. But up 3, up 6 for example, shouldn't be the expectation bc you'll leave disappointed more often than not.

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I suppose the most obvious starting point is Keynes: 'the markets can remain irrational longer than you can remain solvent.'

 

It's not much help, but I'd suggest that you are the only person who know if you're capable of doing it.  It seems that Gregmal can trade Shorts.  I absolutely can't.  I'd say very few people can, so you need to be confident.

 

I agree that you've put a good Short-able list together, but I've just seen so many 'obvious' shorts go wrong over the years.

 

Thanks! I have a pretty good track record shorting historically, mostly because I only do it when I see a fat pitch (typically every couple of years I find one). I'm looking at this as more of a hedge/basket approach. I think the market as a whole is getting expensive-ish, and this gives me the confidence to remain invested, because in a crash this basket should overshoot to the downside.

 

But I agree that the market can remain irrational a long time. That's the primary reason I'm using puts vs direct shorts. At my current exposure my maximum loss is 4%, which doesn't threaten my solvency at all. Obviously a direct short of something that goes up 700% (TSLA, eg) could be very bad.

 

I'm also leaving room to double down if things continue to be absurd for another year. Maybe all the stimulus checks go into otm calls on fad stocks and it goes up for another year. In that case, I'll likely reload for over time.

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Thats a good component of my short/hedge basket. I'd add ZM and BYND although BYND Ive covered a little bit as Impossible is garnering a $4B valuation in private rounds, which if you translate that to a public valuation, doesnt make BYND seem as egregious. Although I still think its egregious, I'd just be mindful of what that could imply as far as short/intermediate downside may be.

 

Others, NVAX, FCEL, TLMD, JKS, FEYE and maybe..although I have some hesitations, CVNA and PTON.

 

And, no, you never lose all your money if you came prepared. If you cant take a short going against you 5-10x you shouldn't be shorting or are doing it wrong. I also think outright shorting to make money isnt ideal 95% of the time. It's more an attractive way to offset some risks being long if you pair/size it properly. 10 up, 3 down is still +7. The attractiveness is that if you are somewhat in the same ballpark from a timing perspective, both sides can work out. But up 3, up 6 for example, shouldn't be the expectation bc you'll leave disappointed more often than not.

 

Thanks! I'll look at those names. Thinking of taking this up to 6-7% or so. I was actually joking about the "lose all my money" comment. I think I've followed FFH long enough to realize that naked shorts of momo stocks is too risky for my constitution.

 

I think the psychology is key here more than the valuation in some ways. I follow a forum for my favorite NHL team, and have started to see posts there about riding the SPAC boom. Once all the marginal $$ are in the game the end is near.

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Does anyone ever use short positions to accumulate high quality companies with extreme valuations?

 

Let's say I want to own Tesla but can't stomach paying 100X earnings or whatever it is nowadays. And further let's say I think a fair price is 75x earnings. Just to use random round numbers.

 

One could buy Tesla with $100 and then use options to short NIO for $25 of notional exposure. Or some other electric car company that you feel is "inferior" to Tesla.

 

So worst case is Tesla drops and NIO doesn't, ok sure. But I think more realistically in a downturn your Tesla position is hedged to your "fair value" price, and perhaps the more volatile hedge company pays off even further.

 

 

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Thats definitely an interesting and creative idea. I feel like its also an idea inspired by being in a bubble! Whats a man got to do to buy some reasonable priced growth stocks!

 

But yea, that does kind of get to the core of where shorting out quality discrepancies within the valuations would make sense.

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Let's say I want to own Tesla but can't stomach paying 100X earnings or whatever it is nowadays. And further let's say I think a fair price is 75x earnings. Just to use random round numbers.

 

I really like this idea, and might use it to add an AirBNB position. Quality business that's overpriced right now. Have to think about what the right offsetting pair would be.

 

Worth mentioning that in round numbers TSLA is more like 1400x earnings.

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QS, BLNK, BLDP, PLUG, FCEL? QS is already down +50% from the top.

 

I'm no expert and I don't know all the pitfalls to look out for, which is why I generally avoid buying options, but this bubble all the innovation happening everywhere seems like a generational opportunity for options speculators.

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How are people thinking about timing? It might be late by then, but wouldn't it make sense to way for all the stimmy checks to arrive and perhaps even for spring to come around? When people are all vaccinated, inflation starts picking up, and the economy is perhaps still in the doghouse, it's easy to see a change in narratives. But I'm crap at this game, so don't listen to me. :)

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I'm copying this from the hockey forum I mentioned previously.

 

"SPCE is stellar. I had to walk away from my computer yesterday because of that move, as i was so excited. I parked 40% of my capital in that at $24, and am holding til $40"

 

The move this person is talking about is from the announcement that ARK is launching a space ETF. The market has concluded that they will raise a bunch of money, and that when they put that in it will drive up these stocks. And so a huge number of people are trying to front run, and then others see the momentum and jump in.

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Thanks! I have a pretty good track record shorting historically

 

Sorry, I didn't know that or would have been less generalist.

 

I've been frustrated as I finally found a couple of decent long/short funds, but even they've had a rotten couple of years e.g. they were very early on Wirecard, and were just PUNISHED for it.

 

Personally I agree with you that in a bubble environment Puts are heaps more sensible than direct Shorts, though Gregmal's ARK approach is interesting.

 

p.s. Thanks for the colour from the Hockey Forum - that's interesting stuff.  I remember in '99 as a young 'un, all my friends not in Finance were trading tech stuff.  Haven't seen that for a while...

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Thanks! I have a pretty good track record shorting historically

 

Sorry, I didn't know that or would have been less generalist.

 

I've been frustrated as I finally found a couple of decent long/short funds, but even they've had a rotten couple of years e.g. they were very early on Wirecard, and were just PUNISHED for it.

 

Personally I agree with you that in a bubble environment Puts are heaps more sensible than direct Shorts, though Gregmal's ARK approach is interesting.

 

p.s. Thanks for the colour from the Hockey Forum - that's interesting stuff.  I remember in '99 as a young 'un, all my friends not in Finance were trading tech stuff.  Haven't seen that for a while...

 

No worries at all - that was definitely good advice. My track record shorting is good, but also brief, because I barely ever do it, so I definitely don't think it makes me infallible or anything. I think everyone needs to pick a strategy (especially on the short side!) that they can stomach. I can't short this stuff directly, because I'm too chicken and would close it if it ran against me. But puts I can mentally write off as a hedge cost and just let them ride.

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How are people thinking about timing? It might be late by then, but wouldn't it make sense to way for all the stimmy checks to arrive and perhaps even for spring to come around? When people are all vaccinated, inflation starts picking up, and the economy is perhaps still in the doghouse, it's easy to see a change in narratives. But I'm crap at this game, so don't listen to me. :)

 

It seems to me that it makes sense to layer in here. My track record of hitting top/bottom ticks isn't that good. But I was buying at the end of March, because I figured that was pretty low and if it went lower I could always buy more/add leverage.

 

This sort of feels like the opposite. The story stocks seems obviously very high to me. They could absolutely go higher (in which case I'll keep slowly adding) but I don't want to miss the window either. YMMV, obviously, because there is no hard catalyst for this merry-go-round to stop, and the stim checks are a catalyst for it to keep going. But I think everything that can't go on forever does eventually stop.

 

The bubble is not just in story stocks - Look at Deere for example. It is a triple from the 2020 lows, trades st 20x EBITDA and has a stagnating top line. There are many others like this too.

If you think Deere is bad, check out WD40.

 

I really like stuff like this - while I haven't looked yet I suspect the puts are going to be way cheaper on old line industrials trading at high valuations than new economy moonshots trading at absurd valuations, which might make the profit potential bigger.

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For the guys that are buying puts on these overvalued names, what kind of duration are you looking at? I feel like this trade really requires some macro insight that I'm lacking. Mainly because your probably not going to see much if any correction in prices until something changes with interest rates/inflation and provides some alternative to equities.

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I typically look for 3-6 month windows, 20%+ OTM. But you need to have some kind of catalyst. Otherwise puts are just a waste, IMO and you are better off just sizing an outright short properly, or doing something around an ETF/index. They're great because if you go out of the money and time it right you can easily get 3-5x out of it, and then just roll it down the chain until it stops working.

 

 

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Are any of you looking at shorting corporate bonds as a general hedge - perhaps just the ETF's?

 

While many stocks are trading at nosebleed levels, I think the same can be said for a lot of HY bonds. It won't be quiet as explosive if things unravel, but at the same time downside should be much less.  Something like HYG had an equity-like drawdown in March.

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I've also been looking at buying ~1-year out of the money puts as well - but the problem I have had is trade execution as they are extremely illiquid.

 

For example, there may be 1-year puts on Company X at $10, 13, 15, 17, 20, etc.

 

I might be happy buying all of these puts (obviously depending on the price), but I don't want to put limit orders in for all of these in the off-chance that they get filled and I'm left with a huge outsized put position in 1 stock.

 

I've seen some ridiculous prices being filled, but was unlucky to have "chosen" the wrong strike price.

 

Does anyone have ideas on how to better execute longer-dated options?

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Just to throw some things out:

 

We all know that what goes up also goes down ...... but almost always it's with a dead cat bounce. Ideal for a liquid swing trade.

Example: Of late BTC has been trading between 34-40K/token; it is a lot easier to get in/out of BTC token, than it is a BTC put  ;)

 

The issue with euro puts (BTC) is the timing - you have to call the price at end of day, on day X.

Almost always you will lose ... unless you start from a strike that is very high, do it in a mania, use a short term, and don't put it on until you see signs of discourse - lot of ways to screw up and lose your premium. Shorting makes a lot more sense, but it comes with the possibility of uncertain loss.

 

Options, or shorts, your capital is at material risk - swing trade and there is much less risk.

To swing trade: either sell something that you are long in, or defer the purchase of something you want to buy - that simple.

If you can't do that, walk away, as you don't have the temperament for this.

 

Most would argue that the 1.9T US stimulus package will be a positive. Probably one of many, in short succession, as how do US muni's otherwise balance their books WITHOUT raising property taxes? - and collapsing the pump prime. Most would expect coordinated and similar stimulus in many other western nations as well. Do you really want to short against a GLOBAL rising tide?

 

Mania, and bubbles are quite different. You're looking for bubbles largely confined to a narrow group of names (nifty 50), and ideally a demographic. Most think Tesla a short candidate, but the market caps of both BTC and FB are higher. Demographics.

 

If any of this was news to you, this isn't your game.

Step away from the table.

 

SD

 

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Anyone have any recommendations for hypervalued stocks with very low implied volatility? I was thinking of setting up a basket of 1 year puts for insurance. Most are pretty high. For example Tesla is at IV of 70something.

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Are any of you looking at shorting corporate bonds as a general hedge - perhaps just the ETF's?

 

While many stocks are trading at nosebleed levels, I think the same can be said for a lot of HY bonds. It won't be quiet as explosive if things unravel, but at the same time downside should be much less.  Something like HYG had an equity-like drawdown in March.

 

I've wondered about this myself because it's attractive from two perspectives.

 

1) Deflation and or recession rears its head and you'll get a blowout in corporate/Hy spreads again.

 

2) Inflation rears its head and you'll get a blowout in rates. While corporates and HY have lower duration than treasuries, let's not pretend a 5-6% HY bond or a 3% corporate will be ok if treasuries launch 2.50 - 3.0%. Plus, duration for both indices is basically the highest it's ever been.

 

Really the only scenario you lose in is the middle ground - long drawn out changes that are slow. Not outright inflation or deflation, but more disinflation. Definitely a potential, but I think it's less and less likely as monetary/fiscal policy and economic fragility are both at extremes. 

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  • 1 month later...

So this basket of puts on crap has ~doubled in the last 48 hours. The best performer was the OTM ones on SPAK (which i sized the largest as I had identified it as my favorite) That took a 5% position to a 10% position, and being a chicken I've sold a bunch of them today to lock in profits, so its now more like a 2-3% position.

 

This isn't advice, and I cost myself a great deal of money last spring by closing my puts way to soon. So I'm going to keep the last chunk (using the house money fallacy they're free!) and ride this out.

 

 

 

 

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