Comments on: True Job Insurance Means Shorting Your Own Company Part 2

By: Yelena

Yelena — Fri, 10 Oct 2008 14:33:10 +0000

This is great info to know.

By: Stuart

Stuart — Sat, 19 Jul 2008 00:17:18 +0000

I’d like to share a real world example of MAS’ model. Unfortunately it happened to me….twice.

http://www.brainmower.com/?p=20

By: Marketman

Marketman — Mon, 14 Jul 2008 21:22:30 +0000

The advice is sound, but a little more involved to execute. Most people use discount brokers these days and although discount brokers can certainly help with the syntax of placing a leaps order but anything beyond that (picking the strike price for example) would be a recommendation, and reserved for a full service brokers with full price fees.

Let’s take those Washington Mutual employees as an example. Your advice would have been very useful to them 10, 20, 30, or 40 points ago, and those LEAP puts would have paid handsome rewards (and more to come, if you ask me!). But going forward, the risks of riding the LEAP puts are much greater. Take for example the WM 2010 2.50 strike puts (symbol WMIMZ). They currently trade for roughly $1.40 with Washington Mutual (symbol WM) stock trading at $3.23. Just to break even on those 2010 puts, the buyer needs WM to continue tanking to at least the $1.10 level, another 60% decline from todays level. While its certainly feasible that an institution as incompetent as Washington Mutual ($1 million dollar home loans to all girl scouts with verifiable paper routes!) could continue their momentous decline, at some point the stock chart carnage can and does end. When the blood in the streets runs dry, your put options dry up with it.

I love portfolio insurance in the form of Put options, but the time to buy them is when the stock charts are lofty, bonuses are handed out like candy, and the executives are high and fat on the mirage of future expectations. Using the car insurance analogy, you can probably convince someone to sell you insurance after the crash, but the premium you pay for that insurance will be well beyond the damage done.

By: MAS

MAS — Mon, 14 Jul 2008 01:47:16 +0000

Jim,
#2 is 100% correct. In a growing economy, finding replacement employment is much easier.

#3 I’m not sure about that. Maybe a sector short or having your spouse hold the options would be less risky?

Good points.

By: Jim

Jim — Sun, 13 Jul 2008 20:26:10 +0000

This is an interesting post, but three potential issues come to mind:

1) If you have a large percentage of your portfolio in company stock or “in the money” employee stock options this is a good plan (i.e. Enron). For small holdings or out of the money employee options this probably doesn’t make sense though. If you are “perfectly hedged” then the portfolio value never changes, so if it is small it just stays small.

2) This is much more relevant in bear markets, since that is when many more companies fail. I don’t mean wait for a 20% drop first …more like when the 50dma crosses the 200dma on the S&P…

3) Finally, I would check out the rules around insider trading. I honestly don’t know the rules, but it would suck to have your company go bankrupt, get a huge windfall from puts or shorts, then get sent to prison.