I Prefer Negative Losses

[william the wie]

Take SDRL it sells for 11% of book value. If it goes under I can reasonably expect a minimum 400% profit. In the meantime I can make a decent income writing out of the money calls. Since my maximum book value share price is 50% and the share price can not exceed $9.99 I only have a universe of 15 issues but how many do I need?

 

[MarathonMike]

Ok wait, you are talking over my head. So SDRL is tanking and you are stating if it goes to 0 you can expect a 400% profit. Where did that number come from? I'm interested in options so if you don't mind walking me through your example, I'd appreciate it.

 

[waltky]

Ok wait, you are talking over my head. So SDRL is tanking and you are stating if it goes to 0 you can expect a 400% profit. Where did that number come from? I'm interested in options so if you don't mind walking me through your example, I'd appreciate it.

Buying shorts on it.

 

[william the wie]

Ok wait, you are talking over my head. So SDRL is tanking and you are stating if it goes to 0 you can expect a 400% profit. Where did that number come from? I'm interested in options so if you don't mind walking me through your example, I'd appreciate it.

Book value is what a stock is worth when it is priced at exactly shareholder's equity. What 0.11% of book value means is that for every $1 in share purchase you get $9 of tangible assets whether it goes up or down assuming the books aren't cooked. Liquidations go slow so it could be two or more years until you see those $9. Waltky's suggestion is either a joke or suicidal. The only thing dumber than shorting an issue well shy of Book Value is shorting a stock priced at less than Net Working capital. An NWC issue has enough cash to pay off all liabilities in cash and still have more cash in the till than the cost of the shares you bought. Those stocks are rare. The Value line 1700 contains one such issue. 0.06% current incidence translates into a very closely held family run firm that simply wants an easy way to compute inheritance tax.

 

[MarathonMike]

Ok wait, you are talking over my head. So SDRL is tanking and you are stating if it goes to 0 you can expect a 400% profit. Where did that number come from? I'm interested in options so if you don't mind walking me through your example, I'd appreciate it.

Book value is what a stock is worth when it is priced at exactly shareholder's equity. What 0.11% of book value means is that for every $1 in share purchase you get $9 of tangible assets whether it goes up or down assuming the books aren't cooked. Liquidations go slow so it could be two or more years until you see those $9. Waltky's suggestion is either a joke or suicidal. The only thing dumber than shorting an issue well shy of Book Value is shorting a stock priced at less than Net Working capital. An NWC issue has enough cash to pay off all liabilities in cash and still have more cash in the till than the cost of the shares you bought. Those stocks are rare. The Value line 1700 contains one such issue. 0.06% current incidence translates into a very closely held family run firm that simply wants an easy way to compute inheritance tax.

That makes sense thanks.

 

[william the wie]

It's all a numbers game. So, I expect that in case of liquidation opportunity costs will reduce my effective return by nearly half and that is where the 400% return comes from. My 9 SDRL calls means I get @ 3%/month in returns if it doesn't do anything, 30% annual return if the issues get called away, 400% if it liquidates and if it is just a pop up I can get good returns buying back at a lower price than I paid.