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Started By
Message
How do you "short" something
Posted on 7/1/08 at 10:39 am
Posted on 7/1/08 at 10:39 am
and what does that mean?
I hear you guys talking about shorting USO sometimes and I'm curious how this works
I hear you guys talking about shorting USO sometimes and I'm curious how this works
3
Posted on 7/1/08 at 10:47 am to Powerman
you sell it at $X/share, hope it drops in price, buy back the same number of shares you owned at $Y/share, make $Z profit.
Posted on 7/1/08 at 11:24 am to The Hamburglar
quote:
you sell it at $X/share, hope it drops in price, buy back the same number of shares you owned at $Y/share, make $Z profit.
False. "Shorting" is when you sell shares that you don't own. You BORROW shares from a person, sell them high and then buy them back low. Then you return the shares to the owner.
Imagine borrowing someone's car. You sell it to someone else for 10K. That person then loses their job and you buy it back from them for $5K. Then you return it to the person you borrowed it from and give them a rental fee. You keep nearly $5K.
This post was edited on 7/1/08 at 11:26 am
Posted on 7/1/08 at 11:26 am to The Hamburglar
just like ham said. you open up a margin account with your broker and whichever stock you think is going to go down you will sell the stock up front for lets say 100 shares at $50 each. The total you have put in is $5000. As the stock goes down(hopefully) you will be able to buy those shares back to cover your position. Lets say the stock goes down to $35 a share. You buy back those 100 shares at $35 for a total of $3500 and you pay back the broker the 100 shares you borrowed. you are left with $1500 in profit that you made. It gets a little more complicated with margin requirements for your account, but that is a simplified version of the process. IF you hear them talking about shorting the USO, that is the United States Oil fund, so more than likely they assume that oil is overpriced and they see oil prices falling in the future, therefore a good time to short the security. hope it hepls...... 
Posted on 7/1/08 at 11:59 am to Me4Heisman
quote:
False. "Shorting" is when you sell shares that you don't own. You BORROW shares from a person, sell them high and then buy them back low. Then you return the shares to the owner.
To be more specific, what you are describing here is SUCCESSFUL shorting.
Posted on 7/1/08 at 1:38 pm to canuk47
quote:
The total you have put in is $5000.
Just to clarify, you haven't put in $5000. That's how much you received from the short sale. The $5k represents that most you can make on this trade if the stock you shorted goes to zero. Your liability, however, is technically unlimited as there's no limit on how high the stock can go. At some point, you will buy to cover the short and if it has gone up $100 per share for example, you're out an assload of dough. Your broker will have margin requirements which mean you have to keep some amount of cash or assets handy so they know you're good for the amount you owe. If the price rises against you, they have the right to demand more margin or ultimately close you out of your position.
Also, if the stock you short pays a dividend, you are required to pay that dividend to the person you borrowed the stock from. This all happens automatically and you aren't borrowing from a specific person as most brokerage houses hold stock in "street name" so you're really borrowing from the broker's inventory which some other investor has a claim on.
Posted on 7/1/08 at 2:13 pm to txtiger79
quote:
Also, if the stock you short pays a dividend
There are also tax implications for owning a short position during dividend disbursements.
Posted on 7/1/08 at 2:20 pm to go ta hell ole miss
you better watch out, though, or you'll end up with a truckload of potatoes like Zack...
Posted on 7/1/08 at 3:12 pm to Coon
quote:
you better watch out, though, or you'll end up with a truckload of potatoes like Zack...
That's only if you buy on margarine....
I feel horrible for knowing this shite, but I didn't win the office Saved by the Bell trivia for nothing!
Posted on 7/1/08 at 6:57 pm to Tiger JJ
quote:
To be more specific, what you are describing here is SUCCESSFUL shorting.
Better listen to him, he's from Jersey...
Or he's a cow...
Which is the opposite of a bull...
But then bear would be opposite of a bull on this board...
I understanding shorting a stock more than the whole bear, bull, cow thing...
Posted on 7/1/08 at 10:09 pm to Powerman
Don't sell short. Just don't do it. With the existence of the put option, selling short just doesn't make sense. (Unless you have some illegally obtained inside information) You pay a premium, but your loss is limited.
Not to mention when you short you have to pay the dividends on the stock. Essentially, if you short 1 share of XYZ, you have "created" one share of XYZ, and are required to pay the dividends on that share as if you were the corporation XYZ. If you buy a put, you don't pay dividends, and your loss is limited to the price of the put. If you short, you pay dividends, and your loss is in theory - limitless. Limitless losses are bad!
Not to mention when you short you have to pay the dividends on the stock. Essentially, if you short 1 share of XYZ, you have "created" one share of XYZ, and are required to pay the dividends on that share as if you were the corporation XYZ. If you buy a put, you don't pay dividends, and your loss is limited to the price of the put. If you short, you pay dividends, and your loss is in theory - limitless. Limitless losses are bad!
This post was edited on 7/1/08 at 10:12 pm
Posted on 7/2/08 at 12:11 am to ObLaDiObLaDa
quote:
Don't sell short. Just don't do it. With the existence of the put option, selling short just doesn't make sense. (Unless you have some illegally obtained inside information) You pay a premium, but your loss is limited.
This is very broad advice which is improper to give, IMO. Every situation is different.
quote:
Not to mention when you short you have to pay the dividends on the stock. Essentially, if you short 1 share of XYZ, you have "created" one share of XYZ, and are required to pay the dividends on that share as if you were the corporation XYZ. If you buy a put, you don't pay dividends, and your loss is limited to the price of the put. If you short, you pay dividends, and your loss is in theory - limitless. Limitless losses are bad!
All the economics of interest rates, dividends, etc. are priced into the options.
Posted on 7/2/08 at 9:09 am to ObLaDiObLaDa
quote:
Don't sell short. Just don't do it. With the existence of the put option, selling short just doesn't make sense.
What if the stock doesn't have options traded on it? Or options that are traded in a reasonably liquid market?
quote:
If you buy a put, you don't pay dividends, and your loss is limited to the price of the put. If you short, you pay dividends, and your loss is in theory - limitless.
It's a different sort of asset entirely with a different risk profile. Buying a put is the equivalent of shorting a stock and buying a call in combination. The call does protect the downside, true, but you pay a little extra for the insurance. Options (for the individual investor) tend to be expensive insurance, this is a better play for an institution that has lower transaction costs.
Posted on 7/2/08 at 9:59 am to foshizzle
I guess you have a point about stocks where there aren't options traded. Especially considering the smaller stocks are the ones you're probably more like to make money on going short.
Are you saying shorting is a better strategy for individuals and puts the better strategy for institutions? I would think the opposite.
quote:
Options (for the individual investor) tend to be expensive insurance, this is a better play for an institution that has lower transaction costs.
Are you saying shorting is a better strategy for individuals and puts the better strategy for institutions? I would think the opposite.
This post was edited on 7/2/08 at 10:04 am
Posted on 7/2/08 at 10:15 am to ObLaDiObLaDa
I've done both. I admit I have a bias against options because most expire worthless and I'd rather write em for that reason. I have mixed success with both shorting and option buying. I am using the inverse ETF's available now and I prefer to play it that way. They just fit my personality better. Guys I don't think there's a cut and dry right and wrong here. You need to identify which one fits you and your trading style and go from there. Experiment,pay your dues,buy your education and go from there with what works for you.
Posted on 7/2/08 at 10:29 am to bovine1
Transaction costs should always be considered. I'd say options could be better if you want leverage for a big move.
Posted on 7/5/08 at 11:44 pm to ObLaDiObLaDa
quote:
Are you saying shorting is a better strategy for individuals and puts the better strategy for institutions? I would think the
opposite.
Neither, actually. I think buying and holding index funds and worrying about other things is about the only thing the individual can do, anything more than that is just killing time.
I think it *is* possible to play around profitably with shorts/puts/etc. and the big institutions do this all the time. They routinely consider the lowest-cost way to make a bet (short vs. put, for example) and have computers calculate the best way to do it at any given moment 24/7.
The average joe does not have several billion to spend researching the problem and is just wasting time with anything beyond the most simplistic approach, namely, buy some funds and hold 'em for a long time. Then again, we post comments about how Pelini really ought to blitz more often too, so I guess it's to be expected.
Posted on 7/6/08 at 6:16 am to Me4Heisman
Shorting has unlimited risk.... if the stock skyrockets in price, your potential losses continue to grow. There is literally no limit to your losses.
You might want to consider buying an "Inverse" mutual fund that reacts opposite to the market. You can even pick the volatility of the fund. Example: you can by an Inverse mutual fund that reacts 2x what the NAS does but in the opposite direction. If the NAS declines 2%, your MF goes up 4%. Long story short (pardon the pun), you buy it and hope the NAS craters.
Also useful as a hedge.
You might want to consider buying an "Inverse" mutual fund that reacts opposite to the market. You can even pick the volatility of the fund. Example: you can by an Inverse mutual fund that reacts 2x what the NAS does but in the opposite direction. If the NAS declines 2%, your MF goes up 4%. Long story short (pardon the pun), you buy it and hope the NAS craters.
Also useful as a hedge.
This post was edited on 7/6/08 at 6:26 am
Posted on 7/6/08 at 8:18 am to tigerpawl
quote:
Shorting has unlimited risk.... if the stock skyrockets in price, your potential losses continue to grow. There is literally no limit to your losses.
From a theoretical standpoint, sure, but not from a practical one. Yes, you can lose your entire account but probably not much more than that, the brokerage won't let you get so deep as to be "unlimited".
And that assumes you're boneheaded enough to bet it all one asset. Anyone who does that is asking for trouble.
Posted on 7/6/08 at 9:16 pm to ObLaDiObLaDa
quote:
You pay a premium, but your loss is limited.
You can also limit your losses on a short position by placing a stop loss order.
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