Would This Work?

[bovverd]

As you may have experienced yourselves when running potential Rule 1 Company numbers you do often find companies whos share price is way way over sticker.

Are these companies worth shorting with options ?

As I understand from the R1 principles if we discover a stock thats share price is way over sticker then in theory its over valued and just like under valued stock will be likely to face a correction in its price to bring it back in line with what it should be worth.

What made me think of this was a company whos sticker is BVN. It has a sticker of 32.56 but is trading at 53. So is it overvalued by 20 ?

Has anyone had any success shorting stocks when the price is way way over sticker ?

[Leeb06]

I assume that when you mean shorting through options that you are talking about buying puts or doing a spread where you do it for a debit.

I have no issues with shorting stocks and have had success in doing so, but you need to be operating truly within you circle of competence. It isn't a matter of understanding why the company is missing its earnings, but also to understand what is happening behind the scenes that might lead to improvement within the company.

The Rule 1 evaluation of a company is a guide to indicate companies that may have the foundation for future growth. Once a company has been discovered you need to continue doing research until you feel comfortable that the company will continue to grow at its current pace. When shorting a company you need to do additional research and focus on why the company is valued so high. In BVN's case remember you found the name because it had 10 years of growth in Equity, Revenue, Return on Capital Invested and FCF. This doesn't sound like a company that is slowing down, there is a high multiple on the company for a reason. In the case of mining stocks, like biotechs, they are usually given a high multiple because of what they may find in the future. If BVN's current gold mine is to produce 5 years of reserves and infact they announce that they underestimated their findings or if gold continues to rally up to $1000/ounce then this company at $53 dollars might actually be undervalued.

If you feel confident in your research then go ahead, but don't trick yourself into trading with the idea that you can only lose as much as you pay for the option. The main focus of trading / investing is not to lose money. I never put on a trade that I am not confident will be successful regardless of how much money I have on the line.

[quiet investor]

The problem that I see with options is that you not only have to be right about valuation but you also have to be right about timing. The latter could be more difficult than it would seem to be. If you are however trying to lock in profits on an existing position then it could be a viable strategy. Just my thoughts on it.

[npg]

Originally Posted by bovverd

Are these companies worth shorting with options ?

Only if you really believe that your valuation is correct. Did you ESTIMATE the right PE? Did you ESTIMATE the right growth rate? Did you ESTIMATE the right future returns?

A lot of guesswork here. The bit that makes me smile over and over again, is where you need to ESTIMATE the right PE --which itself is an ESTIMATE of what people FEEL the stock should be valued at.

Shorting is a leveraged tool. You may lose more than you have. This can be a very very very dangerous thing for your wallet and self esteem.

At then end of the day, when you are investing you are placing a bet. Just make sure that you know the odds are on your side. You need to eliminate as many variables as possible. You won't if your valuation method depends on guessing the right PE (which is completely nuts).

I would not consider it.

[raphbaph]

Leeb06 has it right, in my opinion.
The problem is you need to be really, really shure that the stock will go down in the future.
When you do it Rule#1 style you might check the technical indicators (the tools) in the reverse direction.

However, I think shorting stocks is more risky, because you can only loose all of your invested money when you invest in stocks (long positions), but every stock has the theoretical possibility of growing to the sky. So you can loose much much more than what you went in with. (Shorting stocks is like borrowing money in a sense).

However shorting stocks is not a leveraged tool like npg suggested.
Its lever is 1:1 or -1:1 or whatever way you want to write it.

I used short positions a couple of times, mostly succesful, but I made shure I knew what I did, and double checked my entry and exit timing.

[bovverd]

Originally Posted by raphbaph

Leeb06 has it right, in my opinion.
The problem is you need to be really, really shure that the stock will go down in the future.
When you do it Rule#1 style you might check the technical indicators (the tools) in the reverse direction.

However, I think shorting stocks is more risky, because you can only loose all of your invested money when you invest in stocks (long positions), but every stock has the theoretical possibility of growing to the sky. So you can loose much much more than what you went in with. (Shorting stocks is like borrowing money in a sense).

However shorting stocks is not a leveraged tool like npg suggested.
Its lever is 1:1 or -1:1 or whatever way you want to write it.

I used short positions a couple of times, mostly succesful, but I made shure I knew what I did, and double checked my entry and exit timing.

Did you use the tools for timing purposes?

[raphbaph]

Yes, I used the three "tools" that P.Town suggested just in the opposite direction, when all of them said sell, i went short, it mostly worked, once I slept on the exit point and lost some, but with stocks I think, you don't have to sit there day and night.

[bigroof]

Originally Posted by bovverd

As you may have experienced yourselves when running potential Rule 1 Company numbers you do often find companies whos share price is way way over sticker.

Are these companies worth shorting with options ?

As I understand from the R1 principles if we discover a stock thats share price is way over sticker then in theory its over valued and just like under valued stock will be likely to face a correction in its price to bring it back in line with what it should be worth.

What made me think of this was a company whos sticker is BVN. It has a sticker of 32.56 but is trading at 53. So is it overvalued by 20 ?

Has anyone had any success shorting stocks when the price is way way over sticker ?

my suggestion is to look for sick companies to short, not healthy ones