You know, a thought -- old Cramer is ex-Goldman -- the saviest guys on the street, bar none; just too darned clever to let a big position in a $70 stock go to $17. I'll bet you Cramer would have taken one of those "here's an offer you can't refuse" hedging packages offered by the underwriters. When this "works" for everyone involved, it's a beautiful thing (I doubt if they trade options on that stock yet, but this can still be done by the persistent). Say you're suddenly worth, or carrying $150M in a single stock. For $10M they'll go out and hedge you for a substantial time period and roll over the puts for you. Essentially, the pitch is "give us (e.g.) $10M of your gains, and we'll guarantee you never give back more than $xxM, over an xx month time period". They make a bundle in margins, you're hedged. Bargain! Certainly very compelling - removes your biggest worry - downside in the equity destroying your newfound wealth.
However, there is a price to be paid (in addition to the hedging overhead) - when they hedge you by buying the puts, which are highly leveraged), the option market maker/hedger must then hedge (to transfer the risk), to get their position to delta-neutral (their slippage, along with time decay and handling the risk associated with the other Greeks, is where a good part of your $10M goes). So, they sell massive quantities of the underlying stock against the naked option positions they established for you (easily done through their "special" margin rules) into the open market. This can put just about any stock into a downtrending tizzy.
If options aren't traded yet, you could still have a stock privately hedged. Done with finesse, it is undetectable and impossible to identify the hedger; happens every day. About a month ago, Steve Case, Chairman of AOL, was rumored to be doing this; some huge put option trades originated in Europe and were impossible to trace. It was not necessarily true, just informed speculation; who knows.
The principle is, when you're setting on a very large concentrated position, (e.g.) it is a shame to let hundreds of millions turn in to tens of Millions, just because the stock gets weak.
-Steve |
