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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Michael Burry who wrote (5792)	1/17/1999 11:11:00 AM
From: Freedom Fighter	Read Replies (4) \| Respond to of 78476

Shorting Overvalued Stocks I have just a few insights into shorting overvalued stocks. The first is that overvalued stocks tend to become more overvalued. If you look at the charts of former high flyers that eventually busted, they almost always bust when the fundamentals clearly deteriorate. Before that, they are driven up by momentum players. In some cases that can be years. Sort of a situation where the stock moves from 40x earnings to 50x earnings all the way to 80x rapidly rising earning. (Being on the short side of this is a total bloodbath even if you are eventually vindicated.) Eventually the growth stops or the fundamental reason you saw for shorting the company comes to pass and the company blows up. So the key to successful shorting is more than just valuation. It is timing the trigger that will expose the fundamental flaw. And you better be right about the flaw, because losses are unlimited if you misunderstood the business. If you use puts and have the timing wrong it's the same story. You can be in the hole so much in premiums before you are right, that when you are right you are struggling to break even. I like the following strategy for entering a short position. I sell naked out of the money calls. If the stock remains out of the money I keep collecting premiums. If it gets into the money, I roll the calls out and sometimes up (depending on the premiums). So I effectively become short the stock because the options are in the money and can be rolled down if the stock price falls. But unlike the short seller, I have collected at least some premiums and missed out on some of the move up because they were originally out of the money. The annualized premium collection can sometimes be as high as 20%-50%. I can be dead wrong about the stock and still break even. The downside to the strategy is if the stock plummets rapidly you only get your accumulated premiums and may not fully participate. I still like this idea better. It limits losses to some degree. Wayne Crimi members.aol.com