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anybody here? i have a quick question on shorting

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August 30, 2009 – Comments (5)

Is this true? I know it is, but i was about to write it as truth, when i decided to ask again (i'm a slow learner, and like to be careful).

 

When you short a stock you 'borrow' stocks with a promise to pay them back, so if the stock skyrockets, you could lose all, or more.  right?

Short = max potential profit 100%    (probably much less)

Short = max potential loss 100%++? (multi-bagger gone wrong)  

 

5 Comments – Post Your Own

#1) On August 30, 2009 at 8:23 PM, SolarisKing (< 20) wrote:

That would result in a margin call right? Does shorting a stock include margins? every time, right?

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#2) On August 30, 2009 at 8:38 PM, 100ozRound (29.70) wrote:

You're pretty much right.

 

the potential loss with a short is actually infinity if you don't ever cover....

and factor in short interest too...it will eat into your gains and extend your losses

and you have to pay out dividends on the security if applicable

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#3) On August 30, 2009 at 8:55 PM, OldEnglish (28.21) wrote:

And, you can have your shares called back by your broker if they let you borrow shares they never actually had. Though they would claim differently.

The interested charged to borrow the stock is also high. Puts are an alternative but the premium is brutal. Lastly, remember that short sellers are a hated class with little political or legal defense. If they decide to pull back your borrowed shares, forget legal action regardless of your proof. The jury will hear "short seller" and it's over.  

The masses still think Enron would be around today if not for evil short sellers like Jim Chanos.

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#4) On August 30, 2009 at 9:06 PM, DEALWITHTHEDAY (62.10) wrote:

So if I added Leveraged short selling to this and the broker pulls the shares it could get pretty ugly.

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#5) On August 31, 2009 at 7:26 AM, GraemesPSP (99.42) wrote:

Short = max potential profit 100%    (probably much less)

Short = max potential loss 100%++? (multi-bagger gone wrong)  

This is sort-of correct, but not exactly.  My first short I made about 600% profit on. Each time the stock halved in value I would double the number of shares I was short - leaving the value of the position the same. Likewise if a stock increases, good risk management would suggest halving the position each time it doubles in value.  However rebalancing at the right time is one of the difficulties of short-ing.  Each time a stock doubles and you halve your position you lose 100%.

As far as short interest, this should be paid to you not by you.  At the moment interest rates are low so short interest is probably 0% at most brokers, however when interest rates go up you should recieve about 0.5% to 2.5% below the LIBOR rate as short interest, depending on your broker.  However what you do pay out is a stock loan fee.  This varies depending on how hard the stock is to borrow, it can vary from about 0.2% a year for most stocks up to 15% for very difficult to borrow stocks.

 

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