My Math Forum How to gamble half on both sides of a coin and still win

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 October 28th, 2013, 09:09 PM #2 Global Moderator     Joined: Nov 2006 From: UTC -5 Posts: 16,046 Thanks: 938 Math Focus: Number theory, computational mathematics, combinatorics, FOM, symbolic logic, TCS, algorithms Re: How to gamble half on both sides of a coin and still win I don't think that works. Suppose your stock is presently valued at $1 per share and you own a thousand shares. If clinical trials go well, your stock will jump to$2 per share; if badly, $0.50 per share. Either way you plan to cash out afterward, paying$0 in the bad case (total take-home: $500) and$150 in the good case in tax (take-home: $1850). You can short your stock by buying 1000 put options for$333; if the stock slides you get $1000 less tax ($25, so take-home is $642), otherwise take-home is$1517. So you mitigated risk, but dropped your expected take-home from $950 to$933 because of increased tax exposure. Now maybe there are good ways to reduce taxes in this kind of scenario, but it seems that the better approach all around is just sell the stock in the first place, netting $1000. (In these examples I taxed only the capital gains over the original$1000 value; you can redo calculations if you want to assume a different capital structure.) In the absence of taxation and other Modigliani-Miller costs you'd be no better off shorting your own stock, aside from reducing risk. That is, even without taxes this doesn't make you money, and with taxes it makes you poorer.

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