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01 26 14 Thoughts - Shorting

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January 26, 2014 – Comments (3) | RELATED TICKERS: CMG , JCP , RSH

I can't stop thinking about shorting stocks.  For one, I believe the market is overvalued so if you short now, you have a tail wind with you.  That said, not may in the motley fool recommend shorting.  There are a lot of risks to shorting.  Your losses aren't capped like in going long.  The most you can lose in going long is your initial investment.  If the short triples, you lose much more than your initial investment.  I think of Akman and his herbal life short, Greenlight Capital's David Einhorn shorting Chipotle, and even me thinking of shorting Best Buy.  I don't know much about herbal life, but I do know that Chipotle has a possibility of going up several fold, so betting against it is much more dangerous than say betting against JC Penny's.  Chipoltle has the possibility (is going to) of opening a ton of new stores, but in addition has the Chop House, and new Pizza concepts that could bear fruit.  That sounds like a terrible short.  JC Penny's sounds like a good short because it's not only not opening stores but is closing them, it also has the headwind of retail sales going online.  I look at Radio Shack the same way.  Boy would I love to short it.  It has the headwind of retail sales going online and even more so because everything they carry is a commodity.  JC Penny's at least has clothing which a lot of people including myself like to go to a store to try on.  Radio Shack also has a lot of locations in malls that are slowly losing more and more traffic.  I suspect many malls are going to start closing around the country in the coming years.

3 Comments – Post Your Own

#1) On January 26, 2014 at 8:37 PM, toshimelonhead (37.01) wrote:

I would just make sure you're not the first one to realize this!  The big thing I check for when shorting in real life is short interest.  Not bothering with shorting anything with 20%+ of shares already sold short.  Too late then.

Brokers are also much more stringent on only allowing shorts of stocks at a certain price, so it's going to be hard to short even JCPenney even if it is facing severe trouble.

 

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#2) On January 27, 2014 at 5:03 AM, ikkyu2 (99.17) wrote:

When was the last time your brokerage came to you and ordered you to sell a stock you own?

Never.  Doesn't happen. If the stock goes down and stays down for a long time, you are never ordered to sell it.

Not so with the short position.  If your position goes against you, your brokerage can demand that you close out the short.  You don't get to say when that happens.  That's why it's not a "long" term bet; it's a "short" term bet and you have to be right in the short term.

Makes it a lot harder to be on the winning side of that trade.  The only folks who consistently win from shorting are the brokerages. 

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#3) On January 27, 2014 at 4:31 PM, Mega (99.96) wrote:

"If your position goes against you, your brokerage can demand that you close out the short."

The individual position going against you is irrelevant.

If you use too much margin on an overall basis, you will get a margin call. That is bad news. If you short something that's difficult to borrow, you will get a failure to deliver and the individual stock will be bought in. That is not particularly bad news.

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