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To: Nancy who wrote (8536)	3/22/2004 8:36:35 PM
From: Sam Citron	Respond to of 13403

OT NFLX short interest What I don't get is how this translates to a reported short interest ratio of only 1.706. finance.yahoo.com . I thought short interest ratio was shorts/average daily volume. In any case, your explanation sounds perfectly plausable. I remember that Mark Cuban kept the billion that Yahoo gave him when they bought his Broadcast.com by using a "costless collar" technique. He was restricted by his sale agreement with Yahoo from selling the Yahoo stock for at least 2 years, so he instead simply bought Yahoo puts. A boatload of Yahoo puts. Those who sold this boatload of puts to Mark likely covered their backsides by selling short Yahoo stock, thus accomplishing what Mark was unable to do himself due to his contractual agreement with Yahoo. If this is a bit hard to conceptualize, think of a long who sells a covered call, which is more conservative than simply being long, because it has bought some insurance from a drop in price. If you have sold short a lot of puts, the last thing you want is for the price to drop substantially and then have to eat a ton of stock. If you short the stock when you sell the put, it buys you the insurance that you need. Market makers get paid for doing transactions, not for taking extraordinary risks. So these kinds of hedges are a way of life for them. If I were an insider and owned a huge amount of restricted stock, I would certainly want put protection, and I believe it is a kind of loophole in the law that I am permitted to obtain it in a private transaction from Merrill, Morgan Stanley or Goldman Sachs. In any case, I have never seen or even heard of such a high short interest figure as what we apparently have with NFLX. Normally a high short interest position, like around 25% of float, is extremely bullish. What happened in the Martha Stewart case is instructive. There was a short interest of about 25% of the float. In the moments before the verdict was read, MSO hit an interday high of 18, before falling rapidly to about 11. Were all these people actually expecting Martha to be acquitted. According to Cramer the picture was more complicated and involves sound principles of risk management in a discrete time-period binary risk situation. The big shorts had to cover their risk by buying calls and the big market makers that sold the calls to them had to cover their risk by buying the shares. Cause you can't be left holding the bag when the gong sounds. So the question is-- if a large (25%ish) short interest is bullish, is a humongous short interest humongously bullish or does it result instead in a gradual selling stampede by the folks who have sold all those puts to the Netflix insiders, who will need to cover their buts by selling short the stock if there is any reasonable possibility that they may have to pay out on the insurance policies they have sold the insiders. This is not a time-certain risk like a verdict rendering in the Martha Series case. So perhaps the hedge need not happen at once in such a way that would destabilize the market, which is very contrary to their interest. Could this be why the retreat in NFLX has been so orderly and why it has not risen the way TASER has? Let's see how it all plays out. I wouldn't be surprised if it ends up more like Yahoo did in 2000 than Taser did in 2004, which would be surprising considering the consesnus view that high short interest is very bullish. Sam