2094: "Short Selling"

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2094: "Short Selling"

Postby Quizatzhaderac » Fri Jan 04, 2019 5:01 pm UTC

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Title Text: "I'm selling all my analogies at auction tomorrow, and that witch over there will give you 20 beans if you promise on pain of death to win them for her." "What if SEVERAL people promised witches they'd win, creating some kind of a ... squeeze? Gosh, you could make a lot of–" "Don't be silly! That probably never happens."[/i]

I feel this is misleading as it fails to take into account the rapidly diminishing marginal value of magic beans.

For those who don't know, short selling is a mechanism where you're allowed to sell stocks immediately (before you buy them) and you have to buy them within some predetermined time-frame. If the stock goes down, you're well off, it it goes up, you're in trouble.
The thing about recursion problems is that they tend to contain other recursion problems.

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Re: 2094: "Short Selling"

Postby poof312 » Fri Jan 04, 2019 5:44 pm UTC

Pretty good!

For those that don't know, it's actually fairly simple...

1. Borrow shares from someone that owns them (your broker handles the details)
2. Sell the borrowed shares on the market
3. Buy the shares back (ideally at a lower price than when you sold them)
4. Return the shares to the person/entity you borrowed from (this step is automatic)

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Re: 2094: "Short Selling"

Postby Soupspoon » Fri Jan 04, 2019 5:46 pm UTC

Quizatzhaderac wrote:I feel this is misleading as it fails to take into account the rapidly diminishing marginal value of magic beans.

You're saying that magical beans quickly become has beans?

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Re: 2094: "Short Selling"

Postby Quizatzhaderac » Fri Jan 04, 2019 6:34 pm UTC

Absolutely, four magic beans are useful, the fifth just leaves you in a sate of "has bean".
Old saying wrote:Four magic beans in a row:

One for the roc,
one for the anti-crow,
one to wither,
one to super-grow.
The thing about recursion problems is that they tend to contain other recursion problems.

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Postby Bo Lindbergh » Fri Jan 04, 2019 6:48 pm UTC

It's a good thing he didn't ask about naked short selling.

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Re: 2094: "Short Selling"

Postby Bridge Troll » Fri Jan 04, 2019 7:05 pm UTC

It seems everyone wants to show off their overwhelming intelligence by demonstrating how easy to understand the concept is, so let me take a shot at making it even simpler: shorting is just reversing the adage "buy low, sell high" into "sell high, buy low".

If you expect a share to rise, you can monetise that expectation by buying shares before they do rise. If you expect a share to fall, though, you can't conventionally profit from this, since buying shares before they fall gets you nowhere, and if you buy them low after they fall there's not necessarily an expectation they will ever recover to their previous price. In comes shorting to let you sell shares before you own them, letting you sell high before buying low. Ideally. Of course, the stocks can go up in value after you sell them, in which case you're selling high and then buying higher.
Last edited by Bridge Troll on Fri Jan 04, 2019 7:14 pm UTC, edited 1 time in total.

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Re: 2094: "Short Selling"

Postby Mutex » Fri Jan 04, 2019 7:08 pm UTC

poof312 wrote:Pretty good!

For those that don't know, it's actually fairly simple...

1. Borrow shares from someone that owns them (your broker handles the details)
2. Sell the borrowed shares on the market
3. Buy the shares back (ideally at a lower price than when you sold them)
4. Return the shares to the person/entity you borrowed from (this step is automatic)

Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?

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Re: 2094: "Short Selling"

Postby Flumble » Fri Jan 04, 2019 7:10 pm UTC

Short selling is quickly giving lard in return for money to someone who's no taller than 1.50m (5ft).

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Re: 2094: "Short Selling"

Postby Bridge Troll » Fri Jan 04, 2019 7:11 pm UTC

Mutex wrote:Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?


What's in it for them is that the stocks can go up in price, not just down in price. You've made a promise to buy back the shares within a given time period, so if the shares rise in that time frame, then the person you borrowed from is getting paid back more than you borrowed from them.

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Re:

Postby Soupspoon » Fri Jan 04, 2019 7:20 pm UTC

Bo Lindbergh wrote:It's a good thing he didn't ask about naked short selling.

That's going out onto a trading floor wearing only the "nevernude" items from the series Arrested Development, isn't it?


Mutex wrote:Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?
If they hadn't lent them to you, they knew they were still going to hold onto them*, probably. If they hadn't lent the stocks, they'd still probably be worth less (as part of the ups and downs of a more long-term stock-holding strategy) and additionally they wouldn't even have been able to charge the 'borrowing fee' if they hadn't lent them out to the short-seller.

You'd have to be wary of lending to outfits that might be unable to fulfill the share-return phase (they totally misread the market and were unable to recover them, or unwilling to, and defaulted), but the dip in price is not generally the problem.


* Not sure about what they'd do if they learnt a stock-crash had happened while they weren't able to sell of themselves. That's what High Finance is all about, though. Someone always takes the risks other people don't, and avoid the ones that other people try to exploit.

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Re: 2094: "Short Selling"

Postby Apeiron » Fri Jan 04, 2019 7:21 pm UTC

poof312 wrote:Pretty good!

For those that don't know, it's actually fairly simple...

1. Borrow shares from someone that owns them (your broker handles the details)
2. Sell the borrowed shares on the market
3. Buy the shares back (ideally at a lower price than when you sold them)
4. Return the shares to the person/entity you borrowed from (this step is automatic)


Long selling: buy low, sell high.
Short selling: sell high, buy low.

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Re: 2094: "Short Selling"

Postby ucim » Fri Jan 04, 2019 7:32 pm UTC

Mutex wrote:Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?
You win some, you lose some.

There isn't always a "fixed time" where you have to return the shares. In some cases the short can be open ended. But to answer your question, it is possible to borrow money against the shares you own (putting them up for collateral). You can effectively use that money (with restrictions) to buy more shares, increasing your leverage if the shares go up. This is called "buying on margin". But in order to borrow money this way, you have to agree to lend your shares. After all, fair's fair.

To do that, you put those shares in a margin account, and your broker is then free to lend them out. When your lendable shares are actually lent out, you lose some rights in them (like voting and getting dividends).

So, sure, the holder of shares that go down will be annoyed, but they would be in any case. Their shares went down and they didn't sell. Ch*rp. But they get to borrow money against those shares... that are now worth less... so now their collateral is worth less and they now have to pony up against their loan... and if they don't the broker sells their shares (at the worst possible time!... and that's how the market collapsed in 1929, and that's why there are limits on margin.

Leverage works both ways. Pick your poison. But there is one great way to double your money.
Spoiler:
Fold it in half and put it back in your pocket.
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Re: 2094: "Short Selling"

Postby xtifr » Fri Jan 04, 2019 8:27 pm UTC

I have to say that ponytail's explanation of short-selling is not the worst one I've heard. :)
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Re: 2094: "Short Selling"

Postby Eutychus » Fri Jan 04, 2019 10:39 pm UTC

As someone who just watched The Big Short for the first time on Netflix two nights ago*, this is definitely a GOOMHR moment.

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Re: 2094: "Short Selling"

Postby Old Bruce » Fri Jan 04, 2019 10:49 pm UTC

Flumble wrote:Short selling is quickly giving lard in return for money to someone who's no taller than 1.50m (5ft).

Would the person have to be a non vegetarian?

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Re: 2094: "Short Selling"

Postby KarenRei » Sat Jan 05, 2019 1:13 am UTC

Hypothesis: Randall is a TSLA (Tesla) fan.

Short selling has been a hugely controversial topic concerning Tesla over the past year, where it it was for a long time the most widely shorted stock in the US, and whose CEO had a number of very public spats with short sellers. The stock has also gone through multiple short squeezes over the years, as the shorts keep getting squeezed out but then come back thinking, "Okay, well, they survived that, but they're still doomed - THIS time, they're going bankrupt for sure!"

We do at the very least know that Randall has likes Teslas as vehicles:

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Alt-text: The exact cause of the phenomenon is unknown, but it's thought to be linked to atmospheric refraction and you getting a really cool car.

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Re: 2094: "Short Selling"

Postby somitomi » Sat Jan 05, 2019 10:25 am UTC

Quizatzhaderac wrote:Absolutely, four magic beans are useful, the fifth just leaves you in a sate of "has bean".
Old saying wrote:Four magic beans in a row:

One for the roc,
one for the anti-crow,
one to wither,
one to super-grow.

...and one for the road
Image
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Re: 2094: "Short Selling"

Postby ucim » Sat Jan 05, 2019 4:00 pm UTC

somitomi wrote:...and one for the road
Ah. A programmer. Careful not to hit a fencepost.

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Re: 2094: "Short Selling"

Postby ChakatFirepaw » Sat Jan 05, 2019 8:21 pm UTC

Mutex wrote:Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?


As mentioned, it does come as part of the deal for being able to buy on margin. Also, like most loans you have to pay back more than you borrowed.

A simplistic example would be you loaning 100 shares to someone so he can sell short, he makes some money on a dip you were just going to ride out and gives you 110 shares back. Yes, you could have made more doing the sell and buyback on your own, but this way you take much less of the risk, (you are only risking a rise harsh enough for him to be incapable of covering his position).

For the next step, look into options: That's where you pay some money now for the right to buy or sell at a fixed price in the future.

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Re: 2094: "Short Selling"

Postby ucim » Sat Jan 05, 2019 9:05 pm UTC

ChakatFirepaw wrote:A simplistic example would be you loaning 100 shares to someone so he can sell short, he makes some money on a dip you were just going to ride out and gives you 110 shares back.
Well, no. He gives you 100 shares back and pockets the difference. You however can borrow money against those shares you "own" (that were lent out), to buy 30 more shares. Maybe you buy them on the dip, maybe you bought them before the dip. Just don't borrow too much or you'll get a margin call if the stock goes down.

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Re: 2094: "Short Selling"

Postby CorruptUser » Sun Jan 06, 2019 2:21 am UTC

Short Selling has a legitimate purpose in the stock world.

Let's say Company A is in the news for some really cool new idea that'll totally radicalize the world to the xtreme, yo. A few gullible idiots want to buy Company A, and with far more buyers than sellers the stock price of Company A is skyrocketing no matter how many people understand just how stupid it is to buy Company A. Alice knows that this supposed future-tech is actually yet more managerial nonsense, it reeks of a pump&dump (a few people hyping up a company and creating fake buyers only to mass sell off to all the gullible idiots), and the stock is far overpriced. Alice can only sell all of her own shares in Company A, and no more. Enter Short Selling. Alice can now "borrow" Bob's shares through their mutual stock broker by putting up some collateral, sell the shares, and then in a few months buy back the shares and return them to Bob, after the reports finally come out that Company A is a house of cards. It may seem weird, but it is part of a healthy market, as it bursts bubbles before they cause problems. While Short Selling can be abused, e.g. Alice short selling then running a smear campaign against Company A, this is virtually the same problem as someone hyping up worthless companies for a good ol' pump&dump.

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Re: 2094: "Short Selling"

Postby KarenRei » Sun Jan 06, 2019 5:29 am UTC

The problem is just that: that short selling is invariably associated with smear campaigns, and not only is FUD generally more effective than positive PR - it's also a far worse thing to destroy a healthy company than that some idiots invest in an unhealthy company and lose their money.

And yes, short sellers absolutely can destroy healthy companies. One of my favourite examples was one of the targets of Andrew Left (Citron Research), a well known "activist short seller" (aka, someone who launches a negative PR campaign against their targets). Because he's well known, other investors know that whatever he targets is going to go down in price, so they jump on the short-selling bandwagon as soon as he announces, not wanting to be the last to join in. There was an incident a while back where he made a cryptic tweet announcing an upcoming campaign and his followers guessed the company... wrongly. The mistaken target - by any standards, a perfectly normal, healthy company - saw its stock value plunge to a third of what it was before the accidental campaign, and only rise back up once the "correct" target was actually revealed.

Having your stock value plunge may not seem like a big deal, but it can be the difference between life and death. They can prevent you from raising new capital - or even recollateralizing existing debts - on the market. Convertible bonds can mean that you have to come up with cash rather than pay in stock. If you have to borrow and still can manage to, you'll have to pay high interest rates or accept more onerous terms. Suppliers, worried about your company's health, may start requiring more stringent payment terms, further putting the squeeze on your free cash. Customers, also worried about your health, may stop buying your products. It all snowballs. In short, an activist short campaign can kill you. Which is how activist shorts make their money.

Different companies vary in their vulnerability, of course. The most vulnerable are companies that require lots of capital ("growth phase" companies, companies in manufacturing that need new facilities, etc) and/or hold a lot of debt (financial industry, etc). But the simple fact is that short sellers kill companies, and it doesn't necessarily mean that they deserved it - it just means that enough of them piled on that they were able to break the company's back.

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Re: 2094: "Short Selling"

Postby CorruptUser » Sun Jan 06, 2019 6:38 am UTC

I read Left's bio on wikipedia. It appears that most of the companies he reported on were indeed involved in frauds and other shennanigans.

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Re: 2094: "Short Selling"

Postby DavCrav » Sun Jan 06, 2019 1:40 pm UTC

KarenRei wrote:Hypothesis: Randall is a TSLA (Tesla) fan.

Short selling has been a hugely controversial topic concerning Tesla over the past year, where it it was for a long time the most widely shorted stock in the US, and whose CEO had a number of very public spats with short sellers. The stock has also gone through multiple short squeezes over the years, as the shorts keep getting squeezed out but then come back thinking, "Okay, well, they survived that, but they're still doomed - THIS time, they're going bankrupt for sure!"


The point is that Tesla should be going bankrupt. The short sellers are absolutely correct: fundamentally Tesla is completely screwed. What's holding them up is the same thing as was holding up the housing market in 2007. Fundamentally is was holed below the water line and was going to crash, but people didn't want it to, so it wasn't allowed to fail gracefully, and kept moving up until there was no possible way for it to carry on. A reasonable profit margin is about 10% of revnue. Tesla does better than that, at about 15%. Unfortunately it has a minus sign in front of it.

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Re: 2094: "Short Selling"

Postby elasto » Sun Jan 06, 2019 9:37 pm UTC

DavCrav wrote:The point is that Tesla should be going bankrupt. The short sellers are absolutely correct: fundamentally Tesla is completely screwed.


Is it? It made $311m in profit last quarter and is sitting on $3b in cash reserves, up $731m. It reports a 20% profit margin on the Model 3's.

Musk is a true pioneer and the world needs individuals like him, dragging old industries like transportation and space exploration kicking and screaming into the future virtually single-handedly.

Often the big bucks go to the second-movers it's true (just look at Apple), but you can't have a second-mover without a first.

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Re: 2094: "Short Selling"

Postby KarenRei » Sun Jan 06, 2019 10:44 pm UTC

And on the subject of Left and Tesla: Left and other activist short sellers were responsible for the attempt to kill Tesla this summer. Which failed. Left suddenly, right before the Q3 report, betrayed his fellow shorts and switched from anti-Tesla PR to pro-Tesla PR after reversing from a short to a long position, to profit on the gains from the low that he had helped created. The low-end retail shorts who had believed his PR were left holding the bag.

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Re: 2094: "Short Selling"

Postby DaveMcW » Mon Jan 07, 2019 5:28 am UTC

KarenRei wrote:concerning Tesla over the past year, where it it was for a long time the most widely shorted stock in the US, and whose CEO had a number of very public spats with short sellers.

Tesla partly brought this on themselves, by selling convertible bonds. This allowed short sellers to use convertible arbitrage to cover the risk of TSLA going very high, while also profiting from TSLA dropping.

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Re: 2094: "Short Selling"

Postby KarenRei » Mon Jan 07, 2019 11:33 am UTC

Very true. Which is why the timing on Left's switch was so perfect. With Tesla having a free cash flow of nearly a billion dollars in Q3, it became obvious that there was no need for the stock price to actually be above $360 in March '19, since Tesla would clearly be able to meet its goal of paying off the bond obligations in cash. So even if they could hold the stock price down until March, it wasn't going to take down the company.

A couple other big activist short sellers weren't so lucky. Jim Chanos for example stayed short through the Q3 report and his fund (Kynikos Associates) lost a ton of money.

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Re: 2094: "Short Selling"

Postby cellocgw » Mon Jan 07, 2019 12:20 pm UTC

somitomi wrote:
Quizatzhaderac wrote:Absolutely, four magic beans are useful, the fifth just leaves you in a sate of "has bean".
Old saying wrote:Four magic beans in a row:

One for the roc,
one for the anti-crow,
one to wither,
one to super-grow.

...and one for the road


I think you meant to write

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Re: 2094: "Short Selling"

Postby DavCrav » Mon Jan 07, 2019 1:28 pm UTC

elasto wrote:
DavCrav wrote:The point is that Tesla should be going bankrupt. The short sellers are absolutely correct: fundamentally Tesla is completely screwed.


Is it? It made $311m in profit last quarter and is sitting on $3b in cash reserves, up $731m. It reports a 20% profit margin on the Model 3's.


Let's see it post a profit more than once or twice though. Meanwhile, it's lost $6bn so far, so it has a lot of profit left to make to break even overall.

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Re: 2094: "Short Selling"

Postby Zamfir » Mon Jan 07, 2019 3:01 pm UTC

Let's see it post a profit more than once or twice though. Meanwhile, it's lost $6bn so far, so it has a lot of profit left to make to break even overall.

If they can keep up at least the current production and sales volume, while making a regular gross margin on it, then 6 billion is a quite reasonable investment to get to that point.

I think it the questions are
- how much are they polishing the numbers? They are clearly under pressure to present the shiniest interpretation possible, but there is only so much polishing they can get away with
- how will their margins and volume react to increased competition? From now on, they're likely to get more EV competition every year, but the market is also growing.

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Re: 2094: "Short Selling"

Postby DanD » Mon Jan 07, 2019 3:04 pm UTC

ucim wrote:
Mutex wrote:Wouldn't the person you borrowed them from be annoyed that their stocks are now worth less than they were? What's in it for them?
You win some, you lose some.

There isn't always a "fixed time" where you have to return the shares. In some cases the short can be open ended. But to answer your question, it is possible to borrow money against the shares you own (putting them up for collateral). You can effectively use that money (with restrictions) to buy more shares, increasing your leverage if the shares go up. This is called "buying on margin". But in order to borrow money this way, you have to agree to lend your shares. After all, fair's fair.


However, just because your shares are lent out doesn't mean that they aren't still liquid. If your shares are lent, and you want to sell them, the brokers involved will search around and find another set of shares to cover the loan. In theory, it might delay your sale a little bit, but in practice, there's a delay before everything has to clear, so the transaction happens right away, and they have 3 days to resolve the loan situation.

Abusing that delay is the primary version of naked shorting (shorting without borrowing the shares first), although other even shadier versions exist.


To do that, you put those shares in a margin account, and your broker is then free to lend them out. When your lendable shares are actually lent out, you lose some rights in them (like voting and getting dividends).

You do, in theory, lose voting rights. However, the borrower of the shares is responsible for paying you any missed dividends. So you don't lose any money there. In addition, the borrower does pay some interest on the loan (not much), so you get a little bit of income from it.

In practice, almost all of this will be completely transparent to the retail investor. You won't know if your shares are lent or not, it doesn't affect your liquidity, and your broker will just report a line item of the loan interest.

Short selling does have a couple of major risks. The big one is that if the stock goes up rapidly, the loans might be called in (especially if the short purchase was made on margin (for reasons, separate issue). If the loans are called in, the short seller has to buy at whatever price they can find. This drives the stock up even further, repeat until the short interest is cleared. This is called a short squeeze. And while rare, it can be extremely profitable for the original holders.

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Re: 2094: "Short Selling"

Postby Whatev » Mon Jan 07, 2019 4:00 pm UTC

It ought to be pointed out, though, given Randall's chosen analogy, that if you're ever in a situation where you're thinking of a stock like your child, you're doing it VERY wrong.

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Re: 2094: "Short Selling"

Postby Soupspoon » Mon Jan 07, 2019 4:23 pm UTC

And verse-vica?

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Re: 2094: "Short Selling"

Postby ucim » Mon Jan 07, 2019 5:01 pm UTC

DanD wrote:You do, in theory, lose voting rights. However, the borrower of the shares is responsible for paying you any missed dividends. So you don't lose any money there. In addition, the borrower does pay some interest on the loan (not much), so you get a little bit of income from it.

In practice, almost all of this will be completely transparent to the retail investor.
All true, but sometimes it matters. The money you receive is not dividends, and is taxed differently. The broker doesn't have to find other shares to lend (significant with thinly traded stock, though that's not likely to be marginable). But you're right; these are just details. The hard part is thinking of "partial ownership of a company" as something that is lendable. But after all, you can lend "abstract representations of wealth" as well as "actual physical goods", so why not? There are things of value that cannot be lent however: goodwill and reputation come to mind. What else might fall into this category?

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Re: 2094: "Short Selling"

Postby Quizatzhaderac » Mon Jan 07, 2019 5:08 pm UTC

DavCrav wrote:A reasonable profit margin is about 10% of revnue. Tesla does better than that, at about 15%. Unfortunately it has a minus sign in front of it.

And Tesla's capital expenditures are 27%, they would already be profitable if they weren't investing so much in expanding operations/ new technologies.
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Re: 2094: "Short Selling"

Postby aljohnso » Wed Jan 09, 2019 5:22 am UTC

My favorite description of short selling is inverted Wimpy - "I will gladly pay you today for a hamburger on Thursday".

You are not mentioning the options uses of short selling - you can make a synthetic put by shorting the stock and buying the call - and that fact allows you to determine pricing by arbitrage verses the market put... similarly, buying the stock and buying the put is the synthetic call. It also tells you if the market makers interest rates are good, since there are interest implications of the cash parts of the above transactions.

Kinda hard to remember? A call at a strike, with a put sold at the same strike, have profit/ loss potential similar to a stock... so an options type can make stock out of thin air (less voting and dividend concerns)... which in periods of high volatility/low liquidity might have some merit in second order effects. Similarly, you can synthesis a short position in the same way, for similar reasons.

Trade on what I just wrote? Are you mad? Do your due diligence fer gods sake....... but this is something I do remember.

TESLA? Muskovites unite!... but until I sell something to them, I don't think I throw money their way.

speising
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Re: 2094: "Short Selling"

Postby speising » Wed Jan 09, 2019 9:31 am UTC

If the roles in this strip were reversed, it would probably be called "mansplaining". Cueball only expresses a sentiment, he doesn't ask for an explanation.

Mutex
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Re: 2094: "Short Selling"

Postby Mutex » Wed Jan 09, 2019 10:22 am UTC

speising wrote:If the roles in this strip were reversed, it would probably be called "mansplaining". Cueball only expresses a sentiment, he doesn't ask for an explanation.

He explicitly says he doesn't understand how it works. Getting an explanation in response to that... is not mansplaining. Mansplaining involves assuming someone doesn't understand something and giving them an explanation they don't need.

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Keyman
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Re: 2094: "Short Selling"

Postby Keyman » Wed Jan 09, 2019 2:42 pm UTC

Mutex wrote:
speising wrote:If the roles in this strip were reversed, it would probably be called "mansplaining". Cueball only expresses a sentiment, he doesn't ask for an explanation.

He explicitly says he doesn't understand how it works. Getting an explanation in response to that... is not mansplaining. Mansplaining involves assuming someone doesn't understand something and giving them an explanation they don't need.

That's right. It's the rest of the thread here that is monikersplaining. :P
Nothing could be more ill-judged than that intolerant spirit which has, at all times, characterized political parties. - A. Hamilton


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