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1. This is a bug in Sage itself, and can be reported as such. Just put the above code in a python string at the terminal and do octave.eval(s) and it hangs forever. I hope somebody reports it to http://trac.sagemath.org/

2. A workaround in SageMathCloud is to (a) put your code in a file, e.g., mycode.m, then (b) load that file in a worksheet by typing sh('octave mycode.m'). Here's a working example:

   https://cloud.sagemath.com/projects/4a5f0542-5873-4eed-a85c-a18c706e8bcd/files/support/2015-10-29-octave/

Since you're editing a big script anyways, you'll get nice syntax highlighting, etc. using .m file, so this shouldn't be too bad.