3SOF

Reply #8 on: January 12, 2007, 05:26:42 PM, by Terliso:

«Profits in Long or Short position are the same thing right?

(Short position) Let's say you sold short 100 shares of NFLX:
sold short NFLX at ---> $23 = $2,300
Buy to cover at -------> $5 = $500
Profit --> $2,300 - 500 = $1,800 or 78%


(Long position) bought 100 shares of NFLX:
Bought NFLX at ------> $5 = $500
Sold NFLX at ---------> $23 = $2,300
Profit --> -500 + (2,300) = $1,800 or 360%»

Reply #9 on: January 12, 2007, 05:34:04 PM, by David Randolph:

«

Quote from: Terliso on January 12, 2007, 05:26:42 PM
Profits in Long or Short position are the same thing right?

(Short position) Let's say you sold short 100 shares of NFLX:
sold short NFLX at ---> $23 = $2,300
Buy to cover at -------> $5 = $500
Profit --> $2,300 - 500 = $1,800 or 78%


(Long position) bought 100 shares of NFLX:
Bought NFLX at ------> $5 = $500
Sold NFLX at ---------> $23 = $2,300
Profit --> -500 + (2,300) = $1,800 or 360%

Not at all, because in the short case your initial investment is $2,300 and in the long case your initial investment is $500.

In the short position you make $1,800 profit using $2,300 of capital, so 78% profit.

In the long position you make the same $1,800 profit, but on a percentage basis it is a 360% profit on your initial investment of $500.

If you were to invest the same $2,300 buying a stock at $5, you would buy 460 shares. If you sell those 460 shares at $23, your final capital is $10,580, so, again, you made 360% profit, which is the percentage rise from $5 to $23.

The difference between the short and the long case is the initial commitment of capital you need to make, and the profit you make is always:

Final Capital - Initial Capital = Profit in $ terms;
Final Capital/Initial Capital = Profit in % terms.

So, having $2,300 to invest, you make $8,280 if the stock you buy goes from $5 to $23. Yet, if you sell those $2,300 of shares short at $23 and buy to cover at $5, you make a $1,800 profit.

Right?»

Reply #10 on: January 12, 2007, 05:43:54 PM, by Terliso:

Quote from: David Randolph on January 12, 2007, 05:34:04 PM
If you were to invest the same $2,300 buying a stock at $5, you would buy 460 shares. If you sell those 460 shares at $23, your final capital is $10,580, so, again, you made 360% profit, which is the percentage rise from $5 to $23.

So, having $2,300 to invest, you make $8,280 if the stock you buy goes from $5 to $23. Yet, if you sell those $2,300 of shares short at $23 and buy to cover at $5, you make a $1,800 profit.

Ohh yeah, that's fair enough... thanks for clearing that up

Reply #11 on: January 12, 2007, 09:45:32 PM, by realcoolhead:

«Wow, that's a lot of replies on my question  Thanks.

I always had the thinking that shorting is always done on margin and will have to pay margin interest the minute you shorted. David's answer got me to do a bit googling, and found:

https://us.etrade.com/e/t/estation/help?id=1302000000#Understand4

So margin interest only begins at a point when there is not enough cash in the account to cover the short position. That makes sense.

This also explains the question of initial commiment for shorting a stock. Even though you can short $2300 with much less equity on hand, in order not to actually use the margin, you will need the full $2300 cash as colleteral, thus $2300 is "as if" the initial investment.

I like David's idea of covering at 30% profit. It is clearer using a dollar figure not a percentage figure to compare the potential of a short position and a long position: for a $2300 initial investment, a short position can at most net you $2300, whereas a long position can potentially give you much more profit than $2300. Hence there is no need to stay in a short position for too long.»

Reply #12 on: January 13, 2007, 01:03:23 AM, by TerryG:

«NFLX is definitely in the clutches of a bear. Their battle with Blockbuster was at even when Wal Mart folded closing its mail DVD rental service. Now they are looking at Blockbuster's improvement and Hollywood Video becomes the suspect loser in the battle. Who will win the Blockbuster versus NFLX battle?»

Quote from: David Randolph on January 14, 2007, 10:25:46 AM
Reply #12 on: January 13, 2007, 01:03:23 AM, by TerryG:

«NFLX is definitely in the clutches of a bear. Their battle with Blockbuster was at even when Wal Mart folded closing its mail DVD rental service. Now they are looking at Blockbuster's improvement and Hollywood Video becomes the suspect loser in the battle. Who will win the Blockbuster versus NFLX battle?»

Hi TerryG, I believe both, BBI and NFLX will lose, because I don't see any sense in renting DVD's three years from now. Internet downloads, Apple TV/iTunes, video on demand from cable and satellite operators will erode the necessity of renting a DVD.

Also, DVD prices are going down so much that they need to rent the movies at lower and lower prices, because who would rent if they can buy for similar prices?

But I guess I'm seeing too far ahead, three years from now. I believe you're right, over the short term the market is benefiting BBI and selling NFLX due to competitive reasons between the two companies.

Again, I think they will both go under, because video is a digital content, and with time that will come from the internet or to the TV screen directly without any trip to the video-club or waiting for the DVD to come over the regular mail.

They both should be trading at a discount because of this technological threat that I see as inevitable, but no, NFLX is still trading at 36 times 2006 earnings and 28.4 times next year's earnings estimates.

Since there's no point in being short a stock for a very long time (as we've seen, a short sale of common shares has a maximum profit potential of 100%, yet the risk is unlimited, so it is a losers game over the long run), I guess I'll close this short NFLX when it is trading at a more reasonable multiple, say 20 times next year's earnings?

To be trading at that forward earnings multiple, NFLX shares would need to go down to $16 a share. Sounds nice to me.

In the meantime I'll continue holding NFLX short.

News out at Midnight!!!

• Netflix Offers Subscribers the Option of Instantly Watching Movies on Their   PCs - PR Newswire (Tue 12:17am)
http://biz.yahoo.com/prnews/070116/sftu117.html?.v=70
 
• Netflix to Be Delivered on the Internet - AP (Tue 12:06am)
http://biz.yahoo.com/ap/070116/instant_netflix.html?.v=2
 
• Netflix To Stream Live Movies For Free - at Forbes.com (Mon 11:59pm) 
http://www.forbes.com/2007/01/15/netflix-free-video-streaming-tech-media-cz_qh_0116netflix.html?partner=yahootix

This sock moves fast on news...so I might be forced to cover pre-market.

Quote from: David Randolph on January 14, 2007, 11:59:29 AM
Also, DVD prices are going down so much that they need to rent the movies at lower and lower prices, because who would rent if they can buy for similar prices?

Another question related to that is: Who would buy if you can rent it & clone the DVD?

Thanks for posting the news HANDBALLJIM

It pretty much kills my bear case on NFLX. Kind of bad luck on the timing, but of course, bad luck is part of the game of stock speculation, so we need to be prepared for it.

Since my central bearish case was destroyed by the news release, I'll buy to cover the stock. Fortunately the Stocks on Fire Portfolio has a 5% profit on the position, but I fear the stock may open more than 5% higher. I'll close it anyway.

QuoteAnother question related to that is: Who would buy if you can rent it & clone the DVD?

Interesting question Terliso. I bet that it won't be possible to clone the videos rented from Netflix through the internet.

I think this is such a positive development for the future of the company that I wonder if I shouldn't do a stop & reverse here. Livermore did that sometimes and made a ton of money. Also, financials look pretty strong. I wonder ...

I thought some more about NFLX. This new technology and idea of renting through internet streaming opens a whole new world for the company.

I guess this means two very important long term fundamental changes:

1) I'll be able to be a NFLX costumer. Anybody in the entire world will probably be able to be an NFLX's subscriber. This wasn't possible until now. The market potential for the company, with this new technology, rises from 300 million people to 7 billion people;

2) The mailing costs will decline and perhaps disappear over the years.

The following graph shows the company has been delivering strong results for shareholders, with this technological fear out of the way ...



You can see the revenue growth when compared to the Music & Video Stores industry, showing clearly that NFLX is the market leader.

It takes a lot of courage and flexibility to do what I'm about to do. I got courage. I'm flexible.

The Trading Plan is:

Stop & Reverse the NFLX short, hopefully below $24.55 (buy to cover in any case, enter long below $24.55).

"But I guess I'm seeing too far ahead, three years from now. I believe you're right, over the short term the market is benefiting BBI and selling NFLX due to competitive reasons between the two companies.

Again, I think they will both go under, because video is a digital content, and with time that will come from the internet or to the TV screen directly without any trip to the video-club or waiting for the DVD to come over the regular mail.

They both should be trading at a discount because of this technological threat that I see as inevitable, but no, NFLX is still trading at 36 times 2006 earnings and 28.4 times next year's earnings estimates. "

David Randolph, perhaps you are looking too far into the future but it is shifting now. A few years ago the change to Broadband was "Why?", but prices dropped and the shift is happening. The second obstacle is the increasing cost of Broadband Bandwidth or the ability to send these video digital downloads. They will have to multiply bandwidth with the number of digital downloads, because video downloads are a major load to bandwidth.

Cisco and other industry leaders have proposed charging customers an additional amount to maintain the quality of video downloads.

I agree TerryG, that's why I'm no longer short NFLX and I'm actually long at $24.30 now (as planned and sent on the daily newsletter).

I believe the bandwidth cost is a lot less than shipping costs, per film delivered to the consumer.

We'll study more and more about this pick going forward, but now I see NFLX growing more and more into the future, instead of shrinking, and that is a major fundamental change that can make the stock run a lot to the upside, even over the short term, I believe.

We'll see, wish me luck

What about the near-term earning hit? I see they are spending $40 million on it.

Quote from: realcoolhead on January 16, 2007, 09:21:27 AM
What about the near-term earning hit? I see they are spending $40 million on it.

I'm not sure I understood the question realcoolhead, but $40 million is a very low price to pay to access the world market without opening a single store

Ouch, this has been a painful session. It looks like I had the courage, the flexibility, but didn't have ... a real cool head

I guess the market reaction has to do with the news not being so "new" after all.

Anyway, this fundamental development opens many doors (and takes out a cloud) for NFLX, and this is a business I want to own through the ups and downs, because I believe it can grow immensely over the years (as it has been doing recently).

But I probably should just shut up and go refresh my head, that's what I'll do, see you later over the daily updates.