Know When To Walk Away…

22 05 2008

Someone asked an interesting question, “It would seem obvious that it wouldn’t be proper to profit from owning a morally reprobate stock, e.g. Playboy. What about profiting from the demise of a morally reprobate stock, e.g. Selling Short, Put Options, etc.?”

Here’s some brief thoughts on that question.

Put options would involve contracting with someone for the right to sell them a certain amount of shares of the morally reprobate stock at a certain price, for example you would pay $1000 to a broker for the option to sell 1000 shares of Playboy for $50 per share. If the price of Playboy falls to $10 per share, you could exercise the put option by purchasing (if you didn’t already own them) 1000 shares of Playboy on the market for $10,000, and selling them to the broker for $50,000. If the market price stays above $50, then obviously you would not exercise the put option, and forfeit the fee. So basically you are plunking down a bet, and if you win then you get the opportunity to buy Playboys and sell the shares at a profit.

Selling short is somewhat similar in principle. To sell short you would borrow 1000 shares of the morally reprobate stock and sell them at whatever the market price is, with the hope if being able to buy them back at a cheaper price when the market falls and thus repay the borrowed shares to the broker and pocket the difference. So if the market price of Playboy stock is $100, you borrow 1000 shares and sell them for $100,000. If the market price falls to say, $50, then you could repurchase the 1000 shares for $50,000, leaving you with $50,000 in profit and you can return the borrowed shares. If the market price goes up, then you would lose money and have to repurchase the Playboys at whatever the price went up to in order to return the borrowed shares. Either way you have to buy the shares at some point in order to return them.

Both types of gambles seem obviously wrong since they involve borrowing, buying, and/or selling the morally reprobate sticks (which goes right back to the beginning of the question, which even presupposed that it was wrong to profit from owning the stock). I think a good rule of thumb is – if you wouldn’t buy the product, don’t buy the stock, which you pretty much would have to do in any type of method that profits from the demise of the stock’s price.

Can you imagine if your son had a bunch of Playboy magazines in his room all of a sudden, and tried to explain that he was really being a good steward? “Yeah, I figured as Christians exert moral influence in society, the demand for the magazines would drop, and so I borrowed them from the pornography store and am selling them at market price, so that when the price drops in the future I can repurchase them at rock-bottom prices and return them, thus profiting from the demise of the Playboy magazine market. ” Hmmmm – hopefully our practices in the stock market aren’t setting that kind of example.

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