Comment by jfengel
3 days ago
The market can remain irrational longer than you can remain solvent. The market will tolerate infinite BS for arbitrary periods of time.
Which also means being careful of short selling. It can put you at unlimited risk even if you are absolutely right.
> Which also means being careful of short selling.
There are a number of businesses I know are badly run and will eventually fail, but I cannot find a way to monetize that safely without knowing the timeline for failure.
If you are the only person who thinks that it might fail, one cent put options will be free and you can buy them until the price hits zero, and then you can make a cent.
For example, the opportunity to sell $TSLA for $180 in one month costs about thirty cents right now. Keeping this up for ten years would cost $36.
It doesn't work like this. The stock might fall around $10-$20 every month in the worst case scenario. In which case the premium of $180 will keep rising every week, 90% of which will expire worthless.
You have to buy really farther out or really far off strike both of which have nearly zero probability ( delta is nearly zero and less than 1)
That'd work well for a catastrophic Eron-style collapse, but many companies die a slow death, like Sears.
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Put options are worthless once the price of a stock hits $0. At that point, the stock will be frozen and/or de-listed and your ability to exercise your put will be gone.
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> It can put you at unlimited risk even if you are absolutely right.
The risk is in borrowing, not short selling. How many momo jockies out there think about the "unlimited risk" from buying Tesla on margin? In that case, you're shorting USD, but no one talks about that because it always will be fashionable to short USD.
Just like it always will be fashionable to short JPY, for carry and more. Until it's not.
Short selling a stock means borrowing shares and selling them.
Short selling has unbounded downside. If you borrow $1,000 to short sell TSLA and then it soars you might end up losing $100,000.
If you borrow $1,000 to buy TSLA your downside is limited—you can’t possibly lose more than $1,000.
In either case, your broker will liquidate you around $0. Not guaranteed, but very likely. This is the key risk.
Tether provides a good illustration of the principle I mentioned-- which I concede is a bit theoretical in the case of USD:
Tether is supposed to trade at $1 and gets press when it trades below. But, sometimes it also trades above, at $1.01, $1.02 and even perhaps $1.03. So, if you sold a lot of it thinking trading higher was impossible, you can be surprised.
You can short USD by buying Bitcoin or a similar non-correlated asset but how could buying a usd correlated asset (TSLA) be shorting?
Stocks are generally not considered tied to currency- if the company has some fundamental value, that should be inflation proof.
So technically buying almost any stock can be a way of shorting the USD in that you are selling it now and will buy it back later.
The risk - besides that of the company itself- I suppose is that if you have massive deflation you will end up with less USD. I don’t think anyone is worried about massive deflation of the USD, since the Fed can and would prevent that.
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You can also short the USD by buying a different currency. BTC would be more like shorting all currencies.
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