

Twitter now worth over $40 billion - adventured
http://finance.yahoo.com/q?s=twtr

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pastpartisan
Yea so much for the inevitable 'it's a bubble' arguments. Stocks like
Facebook, Linkedin, Zillow, and Trulia that the pundits called 'obvious'
bubbles are trading 50% or higher than their IPO price. This throws more water
on Garry Shiller's argument that bubbles can be predicted or that betting
against 'obvious' bubbles is profitable. Only in hindsight can we proclaim
something a bubble. Even if an overvalued stock does fall you can still lose
all your money shorting if you get a margin call, because the price can rise
much longer than you can remain solvent as attributed to John Maynard Keynes.

Personally, I'm long Twitter by selling covered calls. Pretty much if Twitter
stock stays above $70 I will make $10k by the end of January.

~~~
junto
I'm a bit of a noob when it comes to this kind if thing, but would you care to
explain how you go about "selling covered calls".

The how, where, why and the what's of this kind of financial transaction would
be really interesting to know.

~~~
fsk
"Selling a covered call" is when you own the stock and then write/sell a call,
using the stock you own as collateral.

For example, TWTR is currently $73/share. Suppose you own 100 shares of TWTR.
The March 2014 85 strike call has a bid of $7.90. Suppose you sell one 85
strike TWTR call for $7.90. (1 call equals 100 shares.) You immediately
collect $790 in premium. Your cost basis in your TWTR shares is reduced by
$7.90 per share. (for capital gains tax purposes)

If TWTR is above $85/share in mid-March 2014, whoever owns that call option
will exercise it. You sold your TWTR shares for $85/share, even if the actual
price is much higher. You effectively sold it for $92.90 per share, because
you also collected $7.90 when you wrote the call.

If TWTR is below $85/share in mid-March 2014, the call option expires
worthless, and you keep your TWTR shares and your $7.90.

It's a covered call, you already own the shares, so your loss is limited if
TWTR skyrockets. If TWTR goes to $200/share, you lose big on the call, but
that is offset by the shares you own.

Superficially, this seems like a good trade. You get $7.90 now, and if TWTR
goes up, you sell at a price you're happy with.

However, this is AN IDIOT TRADE. You might as well just write Goldman Sachs a
check directly if you're going to do such stupid things. Why? In the Black-
Scholes formula for pricing options, the "average gain" of stock equals the
risk-free rate. However, on average, stocks go up MUCH MORE than the risk-free
rate. When you write a covered call, you're giving up all the upside.

On average, the stock goes up by more then the premium you get for writing the
call, making this an idiot trade.

The whole point of being in the stock market is that you make good picks and
get a 100% or better gain. You give up that upside when you write the covered
call. The premium you receive for writing the call does not offset (on
average) the missed gains.

When you write the covered call, you still have the risk that the bubble pops
and TWTR crashes. But, you miss out on all the potential upside if there are
many greater fools willing to buy it later.

------
ksec
And Yet, Apple is only worth $500B, at the same valuation Apple would have
worth over $20 Trillion.

