How do I actually go about shorting a stock?
June 15, 2013 8:12 PM Subscribe
There's a company whose management I strongly disagree with and I want to bet against them by shorting their stock. How do I go about doing that?
Johnny Gunn is spot on with everything he said. Shorting can be QUITE dangerous. I respectfully submit that if you do not know how to short, you definitely do not have the skill set to do so yet. If you are absolutely convinced you want to bet against the company, Johnny's suggestion to buy puts is much more prudent.
posted by jcworth at 8:31 PM on June 15, 2013 [4 favorites]
posted by jcworth at 8:31 PM on June 15, 2013 [4 favorites]
What the previous guys said, but with a small addition.
Disagreeing with the management really has very little to do with whether taking a short position on a stock makes any sense. Stock valuations are not entirely up to or in control of management teams, economic headwinds can depress a fine stock and unexpected tailwinds like a peer in the industry having good results can bouy an otherwise poorly run company in stock terms. Or things can change, like a management team can effectively be ousted or replaced.
Even if asking about shorting means you probably should not even be thinking about it, there is the problem that "disagreeing" with management is hardly a sound analysis.
posted by rr at 8:44 PM on June 15, 2013 [2 favorites]
Disagreeing with the management really has very little to do with whether taking a short position on a stock makes any sense. Stock valuations are not entirely up to or in control of management teams, economic headwinds can depress a fine stock and unexpected tailwinds like a peer in the industry having good results can bouy an otherwise poorly run company in stock terms. Or things can change, like a management team can effectively be ousted or replaced.
Even if asking about shorting means you probably should not even be thinking about it, there is the problem that "disagreeing" with management is hardly a sound analysis.
posted by rr at 8:44 PM on June 15, 2013 [2 favorites]
There's a company whose management I strongly disagree with and I want to bet against them by shorting their stock
Are you merely trying to profit from their foolishness or is this about using the capitalist system to influence management? If it's the latter, I don't think shorting a stock is the thing to do. It's not really the same as selling the stock if you already owned it. You'd be better off trying to persuade large shareholders to your way of thinking.
posted by mullacc at 9:21 PM on June 15, 2013
Are you merely trying to profit from their foolishness or is this about using the capitalist system to influence management? If it's the latter, I don't think shorting a stock is the thing to do. It's not really the same as selling the stock if you already owned it. You'd be better off trying to persuade large shareholders to your way of thinking.
posted by mullacc at 9:21 PM on June 15, 2013
Here's the deal. If you sell calls or short by borrowing the stock you can have unlimited exposure. For example, I can borrow shares at 100 on day 1 and if they go to 50 on day two I make 50 dollars! The problem is that if the company takes off and goes to 700 I have to pay 600. A stock can only go to zero, but there is no upper bound. Imagine if you shorted apple stock by borrowing when it was at 12!
Now on the other hand if you buy a put then you have a contract that can only go to zero. You need to make sure you understand the loss you eat up front on the bid/ask spread, the way the volitility of the option increases close to the deadline, and the "Greeks". If you have any more questions feel free to memail me. I'd be interested to know what company you're thinking about and why. One thing to check out is they're p/e ratio and compare it to others in their industry - its probably the best single metric of a company's health (my opinion - Budlffet uses book value). Best of luck!
PS never play with money you don't have. Buying on margin is for suckers.
posted by ishrinkmajeans at 9:49 PM on June 15, 2013 [5 favorites]
Now on the other hand if you buy a put then you have a contract that can only go to zero. You need to make sure you understand the loss you eat up front on the bid/ask spread, the way the volitility of the option increases close to the deadline, and the "Greeks". If you have any more questions feel free to memail me. I'd be interested to know what company you're thinking about and why. One thing to check out is they're p/e ratio and compare it to others in their industry - its probably the best single metric of a company's health (my opinion - Budlffet uses book value). Best of luck!
PS never play with money you don't have. Buying on margin is for suckers.
posted by ishrinkmajeans at 9:49 PM on June 15, 2013 [5 favorites]
Also I want to just counteract the naysayers. You can do this just be really smart about it, read up on it and think about it. You don't have to be a genius to make money shorting a company if they're truly awful. I successfully shorted RIMM for example. Don't buy on margin, don't place money you have to have to eat, and don't place bets with unlimited exposure. Make sure you go to amazon and buy the best three books on options you can find and then read them before you start trading. It should help you get started thinking about stuff and put the brakes on jumping in without properly mulling things over.
posted by ishrinkmajeans at 10:03 PM on June 15, 2013
posted by ishrinkmajeans at 10:03 PM on June 15, 2013
There's so little information in the question, but if this is a company you work for or have special (insider) knowledge of, then you may be doing something unethical or possibly illegal.
But if, not, then you probably want to buy puts and not technically short the stock due to the potential losses in really shorting it.
posted by jclarkin at 10:22 PM on June 15, 2013 [1 favorite]
But if, not, then you probably want to buy puts and not technically short the stock due to the potential losses in really shorting it.
posted by jclarkin at 10:22 PM on June 15, 2013 [1 favorite]
Agree:
1- If your goal is to send a message to management, shorting a stock will not do it. Shorting a stock has zero effect on the price of a stock. It's basically a side bet- it doesn't alter the supply or demand for the stock.
2- Shorting is dangerous. You are literally borrowing someone's stock for a limited time period. Suppose I am holding 100 shares of XYZ stock. I don't plan on selling anytime soon, so I offer my stocks to people to borrow. You pay me $2 a week to borrow my stock. So even if the stock goes down to $98, I break even. Anyway, you give me my $2 and an IOU for one share of stock, and I give you my one share. Now, you sell the stock and keep the $100. A week passes and the stock goes down to $50. You buy a share of XYZ on the market for $50 and give it back to me. I am back to where I need to be. You have an extra $48. However, if the stock goes up, you have to cover the difference.
3- Remember, there is a time limit. The longer you borrow the stock, the more it costs you. So your disagreement with management had better be pretty short term in nature.
4- You are better off buying an option, or just investing in a competitor.
5- And yeah, on preview, jclarkin is absolutely right. Be careful.
posted by gjc at 10:29 PM on June 15, 2013 [1 favorite]
1- If your goal is to send a message to management, shorting a stock will not do it. Shorting a stock has zero effect on the price of a stock. It's basically a side bet- it doesn't alter the supply or demand for the stock.
2- Shorting is dangerous. You are literally borrowing someone's stock for a limited time period. Suppose I am holding 100 shares of XYZ stock. I don't plan on selling anytime soon, so I offer my stocks to people to borrow. You pay me $2 a week to borrow my stock. So even if the stock goes down to $98, I break even. Anyway, you give me my $2 and an IOU for one share of stock, and I give you my one share. Now, you sell the stock and keep the $100. A week passes and the stock goes down to $50. You buy a share of XYZ on the market for $50 and give it back to me. I am back to where I need to be. You have an extra $48. However, if the stock goes up, you have to cover the difference.
3- Remember, there is a time limit. The longer you borrow the stock, the more it costs you. So your disagreement with management had better be pretty short term in nature.
4- You are better off buying an option, or just investing in a competitor.
5- And yeah, on preview, jclarkin is absolutely right. Be careful.
posted by gjc at 10:29 PM on June 15, 2013 [1 favorite]
If you have insider information of a company most usually (almost always) the company policy and legal will let you know about it (if you're in a quarterly meeting that is not yet public). Shorting a company you work for by buying puts can be a good diversification strategy if you think there might be layoffs in the future but in that case you should probably look for employment elsewhere.
posted by ishrinkmajeans at 11:06 PM on June 15, 2013
posted by ishrinkmajeans at 11:06 PM on June 15, 2013
Response by poster: Update, just wanted to note that:
(1) I have no insider knowledge of the company and don't know anyone who works there or who does have insider information. There's an unwarranted stigma against short-selling. If I were asking how to buy a stock I doubt that people would warn me to **be careful** about these things.
(2) I'm not thinking of shorting the company as some sort of protest and I realize that a single trade will not affect the price of a stock. I believe that this company's stock price will drop within the next two years and I want to make money when it does. I think the management is incompetent, not unethical.
(3) I don't plan on buying on margin.
(4) It was my impression that you can limit your losses by having your broker automatically sell if the price goes above a specified level. Is that inaccurate?
Maybe I'm totally uninformed or naive but it doesn't seem like I've gotten the benefit of the doubt in the responses to this question. I'm not convinced that short-selling is as idiotic or impossible as most of you are making it sound.
posted by jtothes at 11:56 PM on June 15, 2013
(1) I have no insider knowledge of the company and don't know anyone who works there or who does have insider information. There's an unwarranted stigma against short-selling. If I were asking how to buy a stock I doubt that people would warn me to **be careful** about these things.
(2) I'm not thinking of shorting the company as some sort of protest and I realize that a single trade will not affect the price of a stock. I believe that this company's stock price will drop within the next two years and I want to make money when it does. I think the management is incompetent, not unethical.
(3) I don't plan on buying on margin.
(4) It was my impression that you can limit your losses by having your broker automatically sell if the price goes above a specified level. Is that inaccurate?
Maybe I'm totally uninformed or naive but it doesn't seem like I've gotten the benefit of the doubt in the responses to this question. I'm not convinced that short-selling is as idiotic or impossible as most of you are making it sound.
posted by jtothes at 11:56 PM on June 15, 2013
jtothes: Maybe I'm totally uninformed or naive but it doesn't seem like I've gotten the benefit of the doubt in the responses to this question. I'm not convinced that short-selling is as idiotic or impossible as most of you are making it sound
Given your response, let me give you some helpful advice. First, with a blunt response to your comment - i.e. "you are totally uninformed and naive.
Second, pay attention - very close attention to the following homily: "A fool and his money are soon parted".
Third, you have just received some excellent advice. If you don't take it and make money, you are one darned lucky guy. If you lose money, it's your own damned fault.
The odds? You will lose money - possibly quite a bit of it - unless you take the advice that several knowledgeable people have taken their valuable time to offer you.
posted by Vibrissae at 12:32 AM on June 16, 2013 [4 favorites]
Given your response, let me give you some helpful advice. First, with a blunt response to your comment - i.e. "you are totally uninformed and naive.
Second, pay attention - very close attention to the following homily: "A fool and his money are soon parted".
Third, you have just received some excellent advice. If you don't take it and make money, you are one darned lucky guy. If you lose money, it's your own damned fault.
The odds? You will lose money - possibly quite a bit of it - unless you take the advice that several knowledgeable people have taken their valuable time to offer you.
posted by Vibrissae at 12:32 AM on June 16, 2013 [4 favorites]
If I were asking how to buy a stock I doubt that people would warn me to **be careful** about these things.
If you buy a stock, you're completely in control of how much you spend. If you're shorting a stock, you can potentially lose a lot of money based on factors that are out of your control.
posted by kidbritish at 12:35 AM on June 16, 2013 [1 favorite]
If you buy a stock, you're completely in control of how much you spend. If you're shorting a stock, you can potentially lose a lot of money based on factors that are out of your control.
posted by kidbritish at 12:35 AM on June 16, 2013 [1 favorite]
If I were asking how to buy a stock I doubt that people would warn me to **be careful** about these things.
Oh I definitely would. If you play with an individual stock in any way (buy or sell), you are playing with fire. It's extremely risky to play with an individual stock. Anything can happen to it, so unless you have spare money you are willing to part with, you should probably not invest in an individual stock. High risk means potential high return but also potential high loss. A diversified portfolio of stocks (by company and company size, industry, country, etc.) is much less risky. If you think you can outsmart the stock market and have figured out something that nobody else has figured out, you might as well just go to Vegas instead and roll the dice because such an assumption is usually incorrect and often leads to bad outcomes.
posted by Dansaman at 12:57 AM on June 16, 2013
Oh I definitely would. If you play with an individual stock in any way (buy or sell), you are playing with fire. It's extremely risky to play with an individual stock. Anything can happen to it, so unless you have spare money you are willing to part with, you should probably not invest in an individual stock. High risk means potential high return but also potential high loss. A diversified portfolio of stocks (by company and company size, industry, country, etc.) is much less risky. If you think you can outsmart the stock market and have figured out something that nobody else has figured out, you might as well just go to Vegas instead and roll the dice because such an assumption is usually incorrect and often leads to bad outcomes.
posted by Dansaman at 12:57 AM on June 16, 2013
Why short?
Options make more sense. There are bear and bull weighted strategies, limited loss/limited gain strategies, low risk strategies. A million ways to participate in movement/non-movement of a stock.
That said, there is no path to certain riches in the market, no matter the company. If there were, we'd all be rich. Repeat this sentence 10,000 times for it contains the absolute truth. There is no guaranteed anything.
You buy the air of hope or fear and nothing more.
Here's the deal... you can't even buy/sell options at a normal brokerage without approval. It's easy to get for things like selling covered calls, but for things like naked puts, good luck. If you get approved for high risk stuff, consider putting your money in a bag and setting fire to it, to save time. I sincerely do not mean to insult, but asking the type of questions you are asking suggests it won't be a profitable strategy. The money part is real. You can lose what you put in, fast. The stock part is fake. You cannot eat it and other people set its value. That value can go to zero. I have had it happen. (Global Crossing went bankrupt and THEN cancelled their common stock and issued more. Everyone who owned anything got nothing. A new crop of idiots profited. Poof. Just like that. Zero.)
If you have any delusions of success, they should at least be based on knowledge of the instruments, vehicles, strategies and risks. That means a lot of extended study and gradual exposure. Over a lifetime.
Good luck, though. Sometimes a wild ass guess pays off. Usually, it does not.
posted by FauxScot at 1:14 AM on June 16, 2013
Options make more sense. There are bear and bull weighted strategies, limited loss/limited gain strategies, low risk strategies. A million ways to participate in movement/non-movement of a stock.
That said, there is no path to certain riches in the market, no matter the company. If there were, we'd all be rich. Repeat this sentence 10,000 times for it contains the absolute truth. There is no guaranteed anything.
You buy the air of hope or fear and nothing more.
Here's the deal... you can't even buy/sell options at a normal brokerage without approval. It's easy to get for things like selling covered calls, but for things like naked puts, good luck. If you get approved for high risk stuff, consider putting your money in a bag and setting fire to it, to save time. I sincerely do not mean to insult, but asking the type of questions you are asking suggests it won't be a profitable strategy. The money part is real. You can lose what you put in, fast. The stock part is fake. You cannot eat it and other people set its value. That value can go to zero. I have had it happen. (Global Crossing went bankrupt and THEN cancelled their common stock and issued more. Everyone who owned anything got nothing. A new crop of idiots profited. Poof. Just like that. Zero.)
If you have any delusions of success, they should at least be based on knowledge of the instruments, vehicles, strategies and risks. That means a lot of extended study and gradual exposure. Over a lifetime.
Good luck, though. Sometimes a wild ass guess pays off. Usually, it does not.
posted by FauxScot at 1:14 AM on June 16, 2013
Response by poster: Fair enough, and I should have also clarified that I would not short unless there were some way of limiting loss (i.e. telling a broker to close the short if the stock hits x price, which I thought was possible to do) and that I don't plan on investing a substantial amount of money this way.
The first point I made above was specific to the numerous warnings against insider trading. Of course anyone should be careful more generally when investing.
posted by jtothes at 2:09 AM on June 16, 2013
The first point I made above was specific to the numerous warnings against insider trading. Of course anyone should be careful more generally when investing.
posted by jtothes at 2:09 AM on June 16, 2013
There's a general rule for finance-related questions on AskMetafilter: if you are coming here to ask these questions you likely do not have the knowledge or experience to successfully do what you want to do.
Shorting stock is a fraught exercise. Buying puts on the stock is less risky.
posted by dfriedman at 4:05 AM on June 16, 2013 [1 favorite]
Shorting stock is a fraught exercise. Buying puts on the stock is less risky.
posted by dfriedman at 4:05 AM on June 16, 2013 [1 favorite]
Regarding short sales, no one in the thread has explained why the exposure is unlimited, so let me take a moment to do that. If you short a 100 shares of XYZ stock, the way the broker handles the trade is to borrow the shares and then sell them. Let's say XYZ was a 100 and, because of the bad management practices you cite, it goes to 50 after a year. When you go to close the short, you do it by buying back the 100 shares you borrowed (now at a basis of 50 instead of 100) and giving it back to the owner. However, maybe the market doesn't care about the management practices of the company or they have some other good news and the stock goes to 150. Now when you go to close the short, you'll need to add an extra 100*$50 to buy the shares back. If a stock is highly criticized -- where you think that it is very obvious they are going to zero -- you can find that there are many other investors with the same belief who have also shorted the stock. This creates a weird dynamic around the stock called a short squeeze where, if the stock goes up, all of those investors shorting the stock start buying to cover their losses, driving the stock up even more.
Trees don't grow to the sky and neither do stocks. Technically your exposure may be unlimited, but in practice, it is more like 200% of your initial investment. If you are going to short, you need to pay attention on a daily basis to what is happening as it is certainly possible for a hot company to double or triple or more in less than a year. Yes, you can put in a stop order with your broker to "automatically" close the trade if the stock hits a certain level. Stop orders are short term things and have expirations, so you still have to stay on top of things.
Regarding put options, the learning curve is long, because you need to have a good understanding of how the underlying mechanics of the stock market work. There was a questions on options last October and I wrote a longish answer on how to get started. There are several other option trading techniques for betting against a stock than just buying puts you would probably want to consider.
Finally, I'll just mention that individual investors who are selling short or buying options are looking at a whole portfolio of investments. An individual short sale or option trade might represent a small portion of the net worth of the portfolio, like 2% to 5%. So having a trade not work out and taking a 1x to 2x loss -- you lost your investment and then some -- is a lot more palatable if that loss represents, say, 5% of your total capital. Your question didn't have much detail, but I'm assuming you have some funds set aside for investments and this it the capital you want to use for this short sale. All of the comments about "options are less risky than shorts" kind of miss the point -- the bigger question here is what portion of your investing funds are you going to need to cover this trade?
posted by kovacs at 5:09 AM on June 16, 2013 [5 favorites]
Trees don't grow to the sky and neither do stocks. Technically your exposure may be unlimited, but in practice, it is more like 200% of your initial investment. If you are going to short, you need to pay attention on a daily basis to what is happening as it is certainly possible for a hot company to double or triple or more in less than a year. Yes, you can put in a stop order with your broker to "automatically" close the trade if the stock hits a certain level. Stop orders are short term things and have expirations, so you still have to stay on top of things.
Regarding put options, the learning curve is long, because you need to have a good understanding of how the underlying mechanics of the stock market work. There was a questions on options last October and I wrote a longish answer on how to get started. There are several other option trading techniques for betting against a stock than just buying puts you would probably want to consider.
Finally, I'll just mention that individual investors who are selling short or buying options are looking at a whole portfolio of investments. An individual short sale or option trade might represent a small portion of the net worth of the portfolio, like 2% to 5%. So having a trade not work out and taking a 1x to 2x loss -- you lost your investment and then some -- is a lot more palatable if that loss represents, say, 5% of your total capital. Your question didn't have much detail, but I'm assuming you have some funds set aside for investments and this it the capital you want to use for this short sale. All of the comments about "options are less risky than shorts" kind of miss the point -- the bigger question here is what portion of your investing funds are you going to need to cover this trade?
posted by kovacs at 5:09 AM on June 16, 2013 [5 favorites]
Shorting (from the outside) may SEEM like it requires no capital, but you have to have the assets to backup a purchase if you get on the wrong side of a move. no legit bank will loan you money on a house if you have no equity. same thing, more or less.
Options can be that way, too, if they are naked. You have to have SOME capital to buy and sell SOME types, but what you are after, obviously, is leverage and optimized risk. It's hard to do that with shorting. Maybe impossible (without insider info.)
If you are committed to a bear play on your random underlying company, and options are traded on it, you should spend a lot of time looking at that. shorting is but one bear approach. options give you dozens.
posted by FauxScot at 5:50 AM on June 16, 2013
Options can be that way, too, if they are naked. You have to have SOME capital to buy and sell SOME types, but what you are after, obviously, is leverage and optimized risk. It's hard to do that with shorting. Maybe impossible (without insider info.)
If you are committed to a bear play on your random underlying company, and options are traded on it, you should spend a lot of time looking at that. shorting is but one bear approach. options give you dozens.
posted by FauxScot at 5:50 AM on June 16, 2013
I will add to my answer (1st one in thread) by saying two things. One, if you prefer to short rather than trade options which you can do such things as buy puts or put spreads, sell call spreads, etc. then here is my advice: Short half of the amount you want to utltimately have on in position. Maybe even a third. Then as you noted, put in a buy stop to cover if it goes over your set loss limit. Sell the other half ( or two thirds) as you are right, not if you are wrong. That is, sell another 1/4 when the stock has dropped by some percentage of the amount you expect it to drop (you do have a set target right?). Then when it drops a little more, short the balance. Your average price will be lower, thus making your profits lower than if you shorted it all at once, BUT, the probability of success is much higher. Your expected return will be better. If the stock goes against you, do not short more, at least initially. If you do not get stopped out, then when it starts on its downward course from the high, after it has shown to be trending down, then short more following my thoughts above. If you get stopped out, you get stopped out. Assuming the stock is borrowable, you can always get back in.
Two, the only way to short is on margin. The only way to do a cash trade and put up 100% is when you buy something.
I have over 15 years experience trading options on stocks, commodities and bonds on the floors of various exchanges as well as another 10+ years trading from upstairs. I happen to prefer to be short stocks than buy them. It is just a personal bias, but stocks drop faster than they go up. I have never had a hard time covering a short unless there is a takeover or some corporate event or if there are too many shorts and you get called in, but try to sell a stock when the market is dropping, and bids dry up. In general, I have found the gaps in liquidity to be on the downside i.e. a lack of buyers not a lack of sellers selling long.
Another thing to keep in mind when trading long or short any one stock is that you can be right, but the timing can be wrong. (Which is why I think you should scale in when proven right). I cannot tell you how many times I have been right and the rest of the market participants wrong. It is painful.
Finally, consider when trading in individual stocks that while you may believe the fundamentals are bad (or good), the overall market trend will have an effect on the price of the stock in the short run. If the market is rallying, your short might just not go up as much as the others in its group, so while your stock underperforms the market, you are right in that the fundamentals are poor, but you are wrong on price. How long and how much pain can you take before you are right?
I am a trader, not an analyst or portfolio manager, but I have seen excellent management teams struggle for profitability and I have seen morons find a way to be profitable with a business. It may take years for a poorly managed company to start to implode and by then, there could be a new management in place. By shorting on the weakness of the management team, you are also betting against the Board of Directors waking up, realizing they have a bunch of jamoke running the show, and firing the lot. All this could happen before the stock collapses.
Good luck.
posted by JohnnyGunn at 7:54 AM on June 16, 2013 [7 favorites]
Two, the only way to short is on margin. The only way to do a cash trade and put up 100% is when you buy something.
I have over 15 years experience trading options on stocks, commodities and bonds on the floors of various exchanges as well as another 10+ years trading from upstairs. I happen to prefer to be short stocks than buy them. It is just a personal bias, but stocks drop faster than they go up. I have never had a hard time covering a short unless there is a takeover or some corporate event or if there are too many shorts and you get called in, but try to sell a stock when the market is dropping, and bids dry up. In general, I have found the gaps in liquidity to be on the downside i.e. a lack of buyers not a lack of sellers selling long.
Another thing to keep in mind when trading long or short any one stock is that you can be right, but the timing can be wrong. (Which is why I think you should scale in when proven right). I cannot tell you how many times I have been right and the rest of the market participants wrong. It is painful.
Finally, consider when trading in individual stocks that while you may believe the fundamentals are bad (or good), the overall market trend will have an effect on the price of the stock in the short run. If the market is rallying, your short might just not go up as much as the others in its group, so while your stock underperforms the market, you are right in that the fundamentals are poor, but you are wrong on price. How long and how much pain can you take before you are right?
I am a trader, not an analyst or portfolio manager, but I have seen excellent management teams struggle for profitability and I have seen morons find a way to be profitable with a business. It may take years for a poorly managed company to start to implode and by then, there could be a new management in place. By shorting on the weakness of the management team, you are also betting against the Board of Directors waking up, realizing they have a bunch of jamoke running the show, and firing the lot. All this could happen before the stock collapses.
Good luck.
posted by JohnnyGunn at 7:54 AM on June 16, 2013 [7 favorites]
Ex-broker here, without nearly as much experience as JohnnyGunn, though I was trained in the fine (and arcane) art of options trading by one of the guys who practically invented modern options trading at Salomon back in the day, and all I can say here is that he is spot on, as are the other commenters in the thread. Don't be like some of my former clients. That hurt to watch, especially the ones I inherited from other brokers who were treating investing as a game.
However, if you're going to do it anyway, do what my hedge fund genius friend and former colleague used to do when she was dealing in especially volatile markets overseas, which was set in place a long term strategy of exactly how much to sell off (or otherwise get rid of) when something went to price A, price B, price C, etc. This should help you hold on to the appreciation you're looking for and mitigate potential losses, too. Seconding the recommendation of various types of options rather than just shorting.
And once you've got the plan in place, STICK TO IT. It's tempting if things are on an upswing to keep shooting for more and more returns, it's the equivalent of buying two more lottery tickets with the $2 you just won on the first one. Discipline is key.
posted by bitter-girl.com at 9:20 AM on June 16, 2013
However, if you're going to do it anyway, do what my hedge fund genius friend and former colleague used to do when she was dealing in especially volatile markets overseas, which was set in place a long term strategy of exactly how much to sell off (or otherwise get rid of) when something went to price A, price B, price C, etc. This should help you hold on to the appreciation you're looking for and mitigate potential losses, too. Seconding the recommendation of various types of options rather than just shorting.
And once you've got the plan in place, STICK TO IT. It's tempting if things are on an upswing to keep shooting for more and more returns, it's the equivalent of buying two more lottery tickets with the $2 you just won on the first one. Discipline is key.
posted by bitter-girl.com at 9:20 AM on June 16, 2013
The fact that you don't understand that shorting a stock is a margin only play makes me think this is not the position for you. I have nothing against shorting, I've done it many times (once I shorted Amazon in the late 90s and ended up "only" losing $80k, if I waited another 10 months I would have lost $1M - that is the unlimited downside people are talking about.) Also, you would have to have the margin coverage to short the stock. I would suggest buying put options, that lets you bet against the stock using fixed funds and you know exactly how much you have at risk. If you want to be against the company in a longer term way than you can with normal puts, look at buying a LEAP (Long Term Equity Anticipation) option - they have much later expiration dates (of course you have to pay for that extra expiration time). I worked at E*TRADE in the late 90s and watched a lot of my co-workers blow through their E*TRADE millions by making ill-advised trades.
posted by ill3 at 9:23 AM on June 16, 2013
posted by ill3 at 9:23 AM on June 16, 2013
You have already gotten excellent advice - listen to JohnnyGunn, he knows what he is talking about.
I used to be an equity derivatives trader at a bank and I still work in the industry (though no longer trading) - I just wanted to emphasize that while buying puts is limited risk, you can still lose all your money. That insurance comes at a cost. With options you are not only fighting the direction of the stock, you are fighting time. If you buy a 1 month 100 strike put on a $100 company and in 1 month's time it's still at $100 (or higher), you lose your entire investment.
The other thing to consider is that companies which make attractive shorts are likely to have more expensive puts. That premium for vol and borrow cost is "baked in" to the cost of the put. In other words, you pay more money for that "insurance" because people expect the stock to be volatile and/or they pay money to be short it. Look at a stock like TSLA, which had a huge short interest as a percent of the float - if you'd been short that stock you would have gotten destroyed (and your puts would have gone to nothing if you held them outright).
The other thing you should keep an eye on is event risk. Quarterly earnings obviously, but also analyst days or some related company reporting (e.g. watch how AAPL behaves on news from semiconductor companies). This event risk will also be baked into the cost of options.
posted by pravit at 1:01 PM on June 16, 2013
I used to be an equity derivatives trader at a bank and I still work in the industry (though no longer trading) - I just wanted to emphasize that while buying puts is limited risk, you can still lose all your money. That insurance comes at a cost. With options you are not only fighting the direction of the stock, you are fighting time. If you buy a 1 month 100 strike put on a $100 company and in 1 month's time it's still at $100 (or higher), you lose your entire investment.
The other thing to consider is that companies which make attractive shorts are likely to have more expensive puts. That premium for vol and borrow cost is "baked in" to the cost of the put. In other words, you pay more money for that "insurance" because people expect the stock to be volatile and/or they pay money to be short it. Look at a stock like TSLA, which had a huge short interest as a percent of the float - if you'd been short that stock you would have gotten destroyed (and your puts would have gone to nothing if you held them outright).
The other thing you should keep an eye on is event risk. Quarterly earnings obviously, but also analyst days or some related company reporting (e.g. watch how AAPL behaves on news from semiconductor companies). This event risk will also be baked into the cost of options.
posted by pravit at 1:01 PM on June 16, 2013
Yeah, very good advice here. I'll just add a reminder:
"The market can stay irrational longer than you can stay solvent."
(Attributed to John Maynard Keynes.)
posted by RedOrGreen at 1:17 PM on June 16, 2013 [1 favorite]
"The market can stay irrational longer than you can stay solvent."
(Attributed to John Maynard Keynes.)
posted by RedOrGreen at 1:17 PM on June 16, 2013 [1 favorite]
I am really impressed with the quality of responses to this question. Not sure if you ended up shorting the stock, but if you digested the information here you won no matter what. I will add one nuanced point, which I do not believe was made. You can indeed put stop loss limits on a short position , but that does NOT mean your limit price will be honored. Example, your badly managed company gets bought out by a competitor who senses they can do better with the enterprise. Stock price doubles. Your broker is NOT obligated to honor your limit price. They are obligated to liquidate your position as soon as they are able, but the financial pain could certainly be considerably more than your anticipated stop loss price.
posted by jcworth at 3:33 PM on July 5, 2013
posted by jcworth at 3:33 PM on July 5, 2013
This thread is closed to new comments.
Rather than shorting the stock, consider buying puts if they have options on the stock. It gives you a definitive known risk and price appreciation if the stock goes down (depending on the delta and gamma).
posted by JohnnyGunn at 8:14 PM on June 15, 2013 [3 favorites]