ok, this is a very elegant and, I think, convincing line of thinking
It should not be, because it underestimates the humans’ stupidity.
Zillow tweaked its algorithms to pay high prices because, yes it’s true, its prior algorithms paid too low to the sellers and they still worked. Zillow made too much profit. I guess their management thought that was a bad look or something and told the programmers to tweak the offers higher.
But if Carvana happens to know that there is going to be a buyer for that car at 20k
I suspect Carvana does not have a buyer lined up for the car. I say this because we purchased a car from Carvana about 3 years ago, and I don’t think that’s how they work. They stage all the cars they are selling online, with detailed pictures, including close-ups of any blemishes. So I’m thinking they wouldn’t have a buyer lined up for a car they have not yet staged. But maybe someone who knows beter can tell me I’m wrong.
John
Zillow tweaked its algorithms to pay high prices because, yes it’s true, its prior algorithms paid
too low to the sellers and they still worked. Zillow made too much profit. I guess their management
thought that was a bad look or something and told the programmers to tweak the offers higher.
I don’t know that story…it actually worked for a while?
Got a link? Sounds like a good yarn.
Certainly it didn’t work at the end.
Last quarter of disclosed operations, they lost an average of $27k per house they flipped.
Jim
Zillow’s lost money because they did a firesale to get out. They could have reduced the loss, but in this hot market, managing to lose so many money per house is an achievement by itself.
Zillow’s lost money because they did a firesale to get out.
They did a fire sale because they shutdown the business unit. If that unit was so profitable why would they have shut it down?
tecmo
…
I don’t know that story…it actually worked for a while?
Got a link? Sounds like a good yarn.
Here you go:
https://www.bloomberg.com/opinion/articles/2021-11-18/zillow…
(Might need registration)
I don’t BS 
Consciously anyway. No doubt as susceptible to accepting and internalizing lies and myths as the next person.
Here you go:
https://www.bloomberg.com/opinion/articles/2021-11-18/zillow…
Thanks. An interesting post- post-mortem.
If true, it’s a cautionary tale, applicable to many a firm reaching for revenue instead of profit, too hard, too long.
And if not wholly true, it’s still a pretty good cautionary fable with the same moral!
Jim
And if not wholly true, …
I admire skepticism, and nothing is wholly true. But I believe Wall Street Journal and Matt Levine would apply at least some truth filter before giving in to the newsworthy aspect of this story. So maybe this is as much as I can do to convince you it’s not a yarn I made up.
I admire skepticism, and nothing is wholly true. But I believe Wall Street Journal and Matt Levine would apply at least some truth filter
I couldn’t read the WSJ article, and I don’t know anything at all about Mr Levine, so I allowed for the possibility of some “colour” in his blog.
Jim
Matt Levine is one of Bloomberg’s most thoughtful and entertaining writers.
Here’s an example from his most recent post: https://www.bloomberg.com/opinion/articles/2022-02-14/shareh…
There are some similarities with the Zillow case; the thought that maximizing a company’s profit is not always the only priority…
dtb
Now around $101. might have to add…
Rgds,
HH/Sean
KMX $90 Jan23 Puts look quite attractive @ $10.5 Annualised return of 17%, 20% @ $95.
I looked at KMX, but found QCOM to be more attractive.
The ATM $140 Jan 23 Put had a 21.6% annualized return.
For the $150 put it was 26.8%.
Stock was trading at $139.7 at the time.
The put premium is not free, that is the price someone is willing to pay you, because they are expecting the stock could potentially drop 35 or 40%.
The put premium is not free, that is the price someone is willing to pay you, because they are expecting the stock could potentially drop 35 or 40%.
Exactly. But the way this discussion usually goes, you win either way. If the stock price is stagnant or increases, the option expires worthless, you win by keeping the premium and you calculate what this represents as an annual return. If the stock price drops , then you win by acquiring the shares at a much lower price than today’s, in addition to keeping the premium. So you win either way!
Just so I can sleep at night, please don’t sell puts, I was being ironic. No, not as in an iron condor. As in irony.
The proper way to assess the value of the put option is to estimate a range of future share price values, with probabilities assigned to the different possible outcomes. Take your return at each stock price, and multiply that by the probability you estimated. The total of all this, discounted back to today, and adjusting for interest rates on the cash you hold until expiry, and taking account of dividends, gives you the value of the option. Market makers have already calculated something like this with a quite sophisticated process, relying principally on historical volatility of the shares and the resultant probabilities of the share price hitting your strike price (the Black Scholes method). There are legitimate criticisms of this particular method, principally that it ignores the valuation of the underlying equity. But people should know that if they sell puts, they are implicitly betting against these market makers, on the assumption that their valuation methodology is better than the market makers’ and other investors’.
I presume that rnam’s methodology involves more than just estimating the return on the put premium if the option expires out of the money. But in case his post leads anyone to believe that’s all you have to do, it isn’t.
dtb
I am not an options trader, and don’t do the sophisticated formulas with greeks.
In my case, I sell puts when I want to own a stock which I feel is undervalued. I always back the short puts with cash.
If the implied volatility is high making the premium attractive, I prefer selling puts to buying the stock. This way I either get a decent yield on the premium or get an even lower price if put to me. I especially opt for short puts when I already own the stock, so I won’t miss out on a multi bagger if stock rallies.
When volatility is low and stock price very attractive, I may buy deep ITM longest dated calls to get leverage. I substantially increased my BRK position with DITM and just OTM leaps purchased in 2019 & 2020.
In my case, I sell puts when I want to own a stock which I feel is undervalued. I always back the short puts with cash.
Here is an example, Last July if you have sold PYPL even $200 put (then stock price was $300), the put premium, is not going to be sufficient at today’s price.
Those who want to buy at lower price are assuming nothing changes except the price. The price changes may happen due to underlying change in the company fundamentals. In such case, will you be still interested in buying the stock?
I sell a very large number of puts every year. It is like picking pennies in front of a road roller. Routinely I get blown, Feb/Mar 2020. A large number and over many years, I make positive returns, just like writing insurance.
Buying options is very different from selling options.
I presume that rnam’s methodology involves more than just estimating the return on the put premium if
the option expires out of the money. But in case his post leads anyone to believe that’s all you have to do, it isn’t.
I find the key to cash-backed put writing is to be sure that you’re equally happy with both possible outcomes.
(a cash return on capital committed at a known rate, or entry into a particular stock position at a modest known discount to the current market price).
It’s important to be equally happy with both outcomes because, sure as shootin’, you’ll get whichever one looks worst at the time of expiry.
You have to believe in the stock at the current price or a bit below. It’s a long strategy.
It’s kind of a 50/50 deal for any one contract, but when done repeatedly over time for the same name I find it works quite well.
You certainly lose badly when a stock drops a lot in a given interval, even though it’s less than you would have lost owning the stock.
But for even the worst of your picks–and I have had some whoppers- that doesn’t happen in every time interval.
Jim
KMX is still falling - down to $94 now. Aparently the used car market is softening up a fair bit.
https://www.marketwatch.com/story/carmax-shares-slide-4-prem…
Chief Executive Bill Nash said the quarter was hurt by macro factors but the rollout of a new online instant appraisal offer helped the company retain its position as biggest U.S. buyer of used cars. “We believe a number of macro factors weighed on our fourth quarter unit sales performance, including declining consumer confidence, the omicron-fueled surge in COVID cases, vehicle affordability, and the lapping of stimulus benefits paid in the prior year period,”
tecmo
…