Theories

Prateik loves naked calls. He knows that it’s risky and not what is acceptable to prudes, but he just cannot let go. He must have had, say, 100s of these in the past 5 years.

We’ll go a little easy today. No biggies. Just 5 exciting fin and eco terms. Let’s roll.

Cockroach theory: This theory proposes that if a firm declares some bad news then there’s probably a lot more bad stuff going on behind the scenes. The crisis of 2008 was the resultant of the firms like New Century Financial declaring bankruptcy in 2007

Razorblade model: This is when a business sells dependent goods for higher prices. The first item sold is often cheaper. More like your razorblades wherein the razor is pretty cheap but the cartridges you buy subsequently adds to the company’s profits. This has been cleverly done by Paytm in recent past with their free magic boxes. Even though it just announces UPI transactions, customers/shopkeepers prefer Paytm thinking that their transactions are more secure with Paytm because of this box.

Chasing nickels around dollar bills: This comes into effect when big companies cut trivial costs – like only tea and coffee, no biscuit – to shore up their profits, while continue wasting money on large expenses like R&D for an outdated technology

Big uglies: Often for profitable veteran firms in industries like mining or steel. Woke twitteratis consider it a strategy to sell these stocks for ‘cleaner’ trendier ones. Just kidding.

Naked call strategy: This relates to the sale of call options without having the stocks to cover them if the need arises. As you’d know from our options thread, traders usually buy calls hoping that the price for that stock would rise up in future; however, if they feel that their hypothesis was wrong, they can also sell those options to other buyers at the premium they paid for those stocks initially. But this would mean that the new buyer can now ask them to deliver stocks if (s)he feels like and for the same the seller would then be obligated to buy them at whatever market price they are at and handover them to the new buyer. The loss in this case is unlimited and hence the strategy is known as a naked call strategy.

So, that’s it.

And Prateik’s indeed a great guy. I guess now you know why. 

Bye bye.

For options: https://www.whatgaurav.com/p/options-101