Stock & Option question: what happens to short and puts when a company goes bankrupt?

[gotsmack]

I own 1 put contract on NEW.

Was wondering what happens if they go under. What if I shorted the stock instead and then they go under do I lose my investment?

 

[dmcowen674]

Originally posted by: gotsmack
Topic Title: Stock & Option question: what happens to short and puts when a company goes bankrupt?

I own 1 put contract on NEW.

Was wondering what happens if they go under. What if I shorted the stock instead and then they go under do I lose my investment?

Hayes Modems..... Enron

 

[JS80]

I remember back in day I shorted Iridium 2 hours before they filed for bankruptcy and halted trading. I think I had to wait a couple months until the bankruptcy shares started trading again and I covered at pennies per share.

As for the options if the stock halts trading your option will most likely be illiquid if out of the money...if it's in the money it'll be fixed at what the market thinks it's bk stock will trade at. Not sure what happens if your option expires while it's still halted...I would exercise the put (and go short) and wait to cover when the bk shares start to trade.

 

[Safeway]

Originally posted by: dmcowen674

Originally posted by: gotsmack
Topic Title: Stock & Option question: what happens to short and puts when a company goes bankrupt?

I own 1 put contract on NEW.

Was wondering what happens if they go under. What if I shorted the stock instead and then they go under do I lose my investment?

Hayes Modems..... Enron

You answered a question with examples. That doesn't work.

 

[gotsmack]

Originally posted by: JS80
I remember back in day I shorted Iridium 2 hours before they filed for bankruptcy and halted trading. I think I had to wait a couple months until the bankruptcy shares started trading again and I covered at pennies per share.

As for the options if the stock halts trading your option will most likely be illiquid if out of the money...if it's in the money it'll be fixed at what the market thinks it's bk stock will trade at. Not sure what happens if your option expires while it's still halted...I would exercise the put (and go short) and wait to cover when the bk shares start to trade.

Thanks. I'm just going to cash out tomorrow. I don't want to risk having my money tied up.

 

[iversonyin]

Just take profit. You up good on the trade. Don't be a pig.

 

[gotsmack]

Originally posted by: iversonyin
Just take profit. You up good on the trade. Don't be a pig.

Yea, I don't want to risk it, but the idea of squeezing another $100 out of the contract is so tempting. The banks can decide if NEW goes bankrupt at any time.


Now I kinda wish I bought more, oh well.

 

[JS80]

Originally posted by: gotsmack

Originally posted by: iversonyin
Just take profit. You up good on the trade. Don't be a pig.

Yea, I don't want to risk it, but the idea of squeezing another $100 out of the contract is so tempting. The banks can decide if NEW goes bankrupt at any time.


Now I kinda wish I bought more, oh well.

Or the banks can save it by lowering their margin requirements or buying out their portfolio.

 

[Slew Foot]

Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

 

[vi edit]

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Did you get in before it went from $15 to $5 a share? If so...that's some pretty nice playing money. About $20k in a week. How much was the premium at the time?

 

[ponyo]

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Nice! I was going to call shens on 2000 contracts but 20 is not bad at all.

Nothing like scoring a hit on options gamble!

 

[gotsmack]

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Then cash out tomorrow and buy 60 Sept puts for LEND.

I'm buying 3, that way you'll keep the 20:1 ratio

 

[JS80]

Originally posted by: gotsmack

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Then cash out tomorrow and buy 60 Sept puts for LEND.

I'm buying 3, that way you'll keep the 20:1 ratio

you really think all these subprimes are going under?

 

[iversonyin]

Originally posted by: JS80

Originally posted by: gotsmack

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Then cash out tomorrow and buy 60 Sept puts for LEND.

I'm buying 3, that way you'll keep the 20:1 ratio

you really think all these subprimes are going under?

Not all subprime are created equal. Some of these guys already laid off the risk thru MBS.
But with option, its limited risk. Its a good bet if it works out like NEW did.

 

[ViRGE]

So would someone mind translating this in to non-market speak? Who's going down the tubes exactly that you're making money off of?

 

[Slew Foot]

Subprimes are falling fast.
http://ml-implode.com/

About 2-3 per day are going kaput. I started to short them last year but got caught a bit in the end of year run up. Made it all back in the lsat couple weeks. Ive got countrywide and indymac already bought, thinking about WAMU as well, but I think they would have too much goverment backup.

 

[IHateMyJob2004]

Originally posted by: ViRGE
So would someone mind translating this in to non-market speak? Who's going down the tubes exactly that you're making money off of?

options (the way beign discussed) are a way to put little money down on a stock and if the stock tumbles.... you make a sh!tload of cash. You risk loosing 100% of your initial investment though.

The people above are betting that lenders in sub-prime markets are going to get killed in the short term. If they are right ... they make a boat load of cash. If they are wrong, they loose their investment. To put things in perspective. We're talking about loosing the investment (big risk) while the reward could be a profit of say 1000%. A BIG reward! So, if you risk $1000, you might loose it all. You might walk away with $10,000. $50,000? It depends on how bad the underlying stock (LEND or NEW in the samples I saw above) tumbles, if at all. The people doing it can give you better specifics on the numbers they are dealing with.

 

[Slew Foot]

Originally posted by: ViRGE
So would someone mind translating this in to non-market speak? Who's going down the tubes exactly that you're making money off of?

Subprime mortgage lenders. Theyre the ones who offer people who otherwise couldnt finance a bucket of chicken, million dollar home loans. They worked fine in the past few years as when the suckers inevitably couldn't pay off the mortgage (there's a reason they're subprime in the first place) they simply sold their house at a profit and moved on. Now that prices have either stagnanted or are falling, they cant sell the homes for a profit and simply walk away from the loans, costing the lending company $$$$, assuming they havent sold the loan to antoher financial entity.

 

[iversonyin]

Originally posted by: ViRGE
So would someone mind translating this in to non-market speak? Who's going down the tubes exactly that you're making money off of?

Lenders that lend money to "SUB-PRIME" borrowers to buy a house. Which are people with BAD credit scores. When they stop paying because housing price came down and they simply hand the keys over and move out. These lenders get hit hard. Some of them might be smart enough to sell the mortgages off to Mortgage-back-securities market. (financial firms such as Lehman Brothers package bunch of similar mortgage they bought from mortgage lenders and sell it to people who want to invest in them)

 

[IHateMyJob2004]

Originally posted by: iversonyin

Originally posted by: JS80

Originally posted by: gotsmack

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Then cash out tomorrow and buy 60 Sept puts for LEND.

I'm buying 3, that way you'll keep the 20:1 ratio

you really think all these subprimes are going under?

Not all subprime are created equal. Some of these guys already laid off the risk thru MBS.
But with option, its limited risk. Its a good bet if it works out like NEW did.

The biggest problem I see is that the better "sub prime lenders" have prepared for this event starting about two years ago. WM for example, has been selling off their higher risk loans for 2 years now (I think it's nearly 2 years anyways). But WM got nailed today for a 3.5% drop.

LEND and NEW are probably "high growth" based business models so they never bothered to hedge their risks. So, they might get nailed.

 

[JS80]

Won't the banks just buy the portfolios of these lenders? It seems like a cheap way for banks to outsource mortgage selling to these lenders, buy them for cheap after killing their credit, do structured products to create MBS/ABS and make a pretty penny...

 

[IHateMyJob2004]

Originally posted by: Slew Foot

Originally posted by: ViRGE
So would someone mind translating this in to non-market speak? Who's going down the tubes exactly that you're making money off of?

Subprime mortgage lenders. Theyre the ones who offer people who otherwise couldnt finance a bucket of chicken, million dollar home loans. They worked fine in the past few years as when the suckers inevitably couldn't pay off the mortgage (there's a reason they're subprime in the first place) they simply sold their house at a profit and moved on. Now that prices have either stagnanted or are falling, they cant sell the homes for a profit and simply walk away from the loans, costing the lending company $$$$, assuming they havent sold the loan to antoher financial entity.

And those companies that are lending money to cashiers to buy $800K homes in California, then doing the actual background check. This was in an actual news story yesterday. Poorly run companies are goign to get killed.

 

[gotsmack]

Originally posted by: Slew Foot
Subprimes are falling fast.
http://ml-implode.com/

About 2-3 per day are going kaput. I started to short them last year but got caught a bit in the end of year run up. Made it all back in the lsat couple weeks. Ive got countrywide and indymac already bought, thinking about WAMU as well, but I think they would have too much goverment backup.

enough yap, are you in with me tomorrow or not? because if it goes the other way misery loves company.

 

[iversonyin]

Originally posted by: JS80
Won't the banks just buy the portfolios of these lenders? It seems like a cheap way for banks to outsource mortgage selling to these lenders, buy them for cheap after killing their credit, do structured products to create MBS/ABS and make a pretty penny...

Check out LEH, BSC, GS, MS stock prices. They take no prisoners in this market. They been hit hard. Investors suspect they have some of these MBS in their portfolio. OUCH

 

[gotsmack]

Originally posted by: JS80

Originally posted by: gotsmack

Originally posted by: Slew Foot
Haha, I bought 2000 contracts of NEW last week. Im living int he $$$ now! Its so obvious that the housing bubble is going to wreck certain segments of the economy, its like having a license to print money.


edit: 20 contracts for 2000 shares.

Then cash out tomorrow and buy 60 Sept puts for LEND.

I'm buying 3, that way you'll keep the 20:1 ratio

you really think all these subprimes are going under?

Subprime lending is tied to economic indicators and everyone is predicting that the economy is going sideways or downwards for the first half of the year.