How to best short the for-proft college industry?
October 15, 2013 4:16 PM Subscribe
I believe at some point in the near future (e.g., the next three years) the revenue model of for-profit colleges will collapse. I would like to take a short position and profit from their failure. What are some creative ways of doing this?
I see that Forbes has an article that touches on this strategy. But it's from a year ago. Is anything else I should be looking for beyond just shorting the stock of the for-profit companies?
I see that Forbes has an article that touches on this strategy. But it's from a year ago. Is anything else I should be looking for beyond just shorting the stock of the for-profit companies?
if part of your view is that those who would have gone to for-profit universities go to state run school, as opposed to not going to university at all, you could buy public university debt.
posted by cupcake1337 at 5:51 PM on October 15, 2013
posted by cupcake1337 at 5:51 PM on October 15, 2013
If you're trying to beat the market it is important to consider your information advantage. It is not enough to think a business model is going to turn south. Specifically ask yourself, "What knowledge do I have that the investor on the other end of the trade does not."
As the Forbes article points out, it's no secret that for-profit colleges are perceived as risky.
If you short APOL (for example), you're borrowing shares and selling them to an investor (possibly a professional investor or even someone with inside information) who, despite the risk, still thinks the current price is a good one. If you are right, you stand to potentially double your money as APOL heads to zero. If the other investor is right, you will owe the other investor any gains the stock makes as well as any dividends it pays out. Your downside is theoretically unlimited (although you can set a stop loss).
posted by justkevin at 6:09 PM on October 15, 2013 [2 favorites]
As the Forbes article points out, it's no secret that for-profit colleges are perceived as risky.
If you short APOL (for example), you're borrowing shares and selling them to an investor (possibly a professional investor or even someone with inside information) who, despite the risk, still thinks the current price is a good one. If you are right, you stand to potentially double your money as APOL heads to zero. If the other investor is right, you will owe the other investor any gains the stock makes as well as any dividends it pays out. Your downside is theoretically unlimited (although you can set a stop loss).
posted by justkevin at 6:09 PM on October 15, 2013 [2 favorites]
Best answer: If you're looking for advice on shorting stocks via AskMetafilter, I don't think you should be considering shorting stocks.
Potential losses on short positions are theoretically infinite; gains are bounded by $0 since stocks can't trade below that price.
In short (excuse the pun), shorting is extremely risky, and even those who do it professionally eke out very small gains. To quote Keynes, the market can stay irrational longer than you can stay solvent.
A less risky option is to buy puts on the stocks you think will go down; that way, your potential losses are limited.
posted by dfriedman at 8:14 PM on October 15, 2013 [7 favorites]
Potential losses on short positions are theoretically infinite; gains are bounded by $0 since stocks can't trade below that price.
In short (excuse the pun), shorting is extremely risky, and even those who do it professionally eke out very small gains. To quote Keynes, the market can stay irrational longer than you can stay solvent.
A less risky option is to buy puts on the stocks you think will go down; that way, your potential losses are limited.
posted by dfriedman at 8:14 PM on October 15, 2013 [7 favorites]
For what it's worth, here are some additional quick thoughts about APOL, since you mention it specifically. Its cash flow statements look awful, and possibly support your thesis that the company is headed for a fall.
But here's the thing. Absent some information that you have that the broader market does not, you can't accurately predict when that fall will happen, if it will.
A quick look at its option chain suggests that the prices of puts on the stock are increasing, but their volume is dwarfed by calls. So, more calls are being bought than puts, which generally implies bullish short-term sentiment on the stock. However, of course, some call volume can be related to put holders (or people holding its stock short) trying to hedge their bets, so who knows.
The point being that, again, unless you have some information that is not currently being factored into the stock price, I don't understand why you would think that you could successfully short the stock.
posted by dfriedman at 9:52 PM on October 15, 2013
But here's the thing. Absent some information that you have that the broader market does not, you can't accurately predict when that fall will happen, if it will.
A quick look at its option chain suggests that the prices of puts on the stock are increasing, but their volume is dwarfed by calls. So, more calls are being bought than puts, which generally implies bullish short-term sentiment on the stock. However, of course, some call volume can be related to put holders (or people holding its stock short) trying to hedge their bets, so who knows.
The point being that, again, unless you have some information that is not currently being factored into the stock price, I don't understand why you would think that you could successfully short the stock.
posted by dfriedman at 9:52 PM on October 15, 2013
Best answer: I'm late to the game here, but I just wanted to add a few points to the advice above:
1) We should examine our own investment theses to make sure they are free of personal bias. I personally hate the ethicality of for-profit schools. They prey on low-income people, charge them exorbitant fees, and eat up government dollars. But if they are profitable and people are willing to pay for their services, then I can't short their stock on that basis alone. How much do you think APOL is worth as a company? $0? 500 million? 1 billion? Just looking at the chart, that used to be a $7 billion company as recently as 2012, and is now only worth $2 billion. It's down almost 65% from its 2012 peak and the stock has basically been going sideways for the past year. They've already killed the stock. What makes you think it isn't oversold? (and keep in mind there are analysts at hedge funds and banks who spend all of their waking hours reading financial statements and crunching numbers to figure out what stocks like this should be worth).
2) Even if you have the right idea, the right time to put on the trade is not necessarily the moment that you think of it. There were people calling the US housing bubble YEARS in advance who lost so much money being short it that they gave up before it finally collapsed. Everyone has their own "tap out" point where they can't take any pain anymore and give up. Bubbles can last for a very long time. Dead companies can re-organize and find new life. Just look at YHOO.
3) Be careful with buying puts. Yes, your loss is limited, but you can still lose all your money. You pay a premium for the limited loss - and as you may have guessed, this premium is typically much higher for companies that people want to be short. You may sometimes hear people talk about "implied volatility" - when they say the vol is high, it means the options are expensive; you pay a high premium. For example, let's say the stock is $100 and you buy a 1-year 90 strike put for $10. If the stock is $90 at maturity, your puts expire worthless and you lose the entire $10 you invested - but if you had shorted the stock you would have made $10 instead! Also remember the puts are time limited. If the day after maturity, the stock goes to 0, too bad, your puts already expired. Even institutional investors have a hard time grasping if they are paying too much for options, let alone retail traders. (I think APOL vol is expensive, for what it's worth).
I think a good example to consider is Herbalife. For what it's worth, I think it's basically a pyramid scheme and it will probably collapse at some point. Bill Ackman, who is a big name hedge fund guy, has been short the stock on this thesis for over a year, and losing tons of money as the stock runs up (and really some of it is his own fault because he's been so vocal about his short that other big hedge funds are trying to squeeze him, but that is beside the point). In fact, it got so bad that he was forced to realize losses on his short, and he bought puts instead (and who knows how those will play out). It's a classic example of good thesis, bad execution. Good luck.
posted by pravit at 4:31 PM on October 16, 2013
1) We should examine our own investment theses to make sure they are free of personal bias. I personally hate the ethicality of for-profit schools. They prey on low-income people, charge them exorbitant fees, and eat up government dollars. But if they are profitable and people are willing to pay for their services, then I can't short their stock on that basis alone. How much do you think APOL is worth as a company? $0? 500 million? 1 billion? Just looking at the chart, that used to be a $7 billion company as recently as 2012, and is now only worth $2 billion. It's down almost 65% from its 2012 peak and the stock has basically been going sideways for the past year. They've already killed the stock. What makes you think it isn't oversold? (and keep in mind there are analysts at hedge funds and banks who spend all of their waking hours reading financial statements and crunching numbers to figure out what stocks like this should be worth).
2) Even if you have the right idea, the right time to put on the trade is not necessarily the moment that you think of it. There were people calling the US housing bubble YEARS in advance who lost so much money being short it that they gave up before it finally collapsed. Everyone has their own "tap out" point where they can't take any pain anymore and give up. Bubbles can last for a very long time. Dead companies can re-organize and find new life. Just look at YHOO.
3) Be careful with buying puts. Yes, your loss is limited, but you can still lose all your money. You pay a premium for the limited loss - and as you may have guessed, this premium is typically much higher for companies that people want to be short. You may sometimes hear people talk about "implied volatility" - when they say the vol is high, it means the options are expensive; you pay a high premium. For example, let's say the stock is $100 and you buy a 1-year 90 strike put for $10. If the stock is $90 at maturity, your puts expire worthless and you lose the entire $10 you invested - but if you had shorted the stock you would have made $10 instead! Also remember the puts are time limited. If the day after maturity, the stock goes to 0, too bad, your puts already expired. Even institutional investors have a hard time grasping if they are paying too much for options, let alone retail traders. (I think APOL vol is expensive, for what it's worth).
I think a good example to consider is Herbalife. For what it's worth, I think it's basically a pyramid scheme and it will probably collapse at some point. Bill Ackman, who is a big name hedge fund guy, has been short the stock on this thesis for over a year, and losing tons of money as the stock runs up (and really some of it is his own fault because he's been so vocal about his short that other big hedge funds are trying to squeeze him, but that is beside the point). In fact, it got so bad that he was forced to realize losses on his short, and he bought puts instead (and who knows how those will play out). It's a classic example of good thesis, bad execution. Good luck.
posted by pravit at 4:31 PM on October 16, 2013
This thread is closed to new comments.
These aren't available for all securities but you can probably find them for some of the larger and heavily traded names. Profiting from option trades can be tricky and they are definitely not without risk, but one advantage they do have when it comes to short positions is it's easy to define and in many cases limit your risk. On a regular short position your risk is theoretically unlimited (i.e. it keeps going up indefinitely) whereas if you own puts your loss is limited only to the premium you paid for them. (i.e. your max loss is 100%)
From CBOE:
What are equity LEAPS®?
Equity LEAPS, or Long-term Equity AnticiPation Securities, are American-style, long-term put and call contracts on common stock or ADRs. These long-term options provide the holder the right to purchase, in the case of a call, or sell, in the case of a put, a specified number of stock shares at a pre-determined price up to the expiration date of the option, which can be up to three years in the future
posted by ninepin at 4:47 PM on October 15, 2013