Quote:
Originally Posted by Chung Tran
They did the same with Avis Budget a few weeks ago. That morning, I shorted one share at $350, then another at $525, as the stock went nuts. Just the 2 shares, because shorting is inherently dangerous. The stock topped at $542, then started dropping. I covered at $312, all this in the space of 6 minutes!
Avis trades at $224 today. I would hate to be the Fool that paid $540+
|
Yes, you're right not to overtrade. Selling short is like walking through a minefield.
It used to be you usually didn't have to pay a ton of money to borrow shares to sell short. Now for some shares at some times you might pay annualized borrow rates of several hundred percent, or more. And that can happen almost overnight, if the short becomes popular. One day you're paying 1/2 of 1% to borrow and a few days later it's 50%+.
If someone or some group on Reddit or Stocktwits starts manipulating the share price, you can lose a ton of money in a hurry, when they push the price up. If the price shoots to the moon, at some point you're going to have to close out your position, or risk getting wiped out. When you're long you can sit on a position forever, until others recognize the value or you pocket enough in dividends to make it worthwhile. When you're selling short, you also have to get the timing right.
If the shares become hard to borrow, you may have to liquidate your position when you don't want to. A way around that is to buy put options instead of selling short, and also write calls if you're so inclined, but that's usually more expensive and it's possible for the puts to be exercised early. Finally, if trading becomes volatile, your broker may up the margin requirements. I've had margin go to as high as 200%.
And here's a cautionary tale for those who might be inclined to short the SPAC that's acquiring Trump's company. I lost a large amount (for me) on one short position in 2020. The company's accounting was fraudulent, and even if they weren't cooking the books, it would have been hugely overvalued. The timing appeared to be right as people were just starting to become aware of the fraud. I sold short in the range of 31 to 33. I intended to buy back if the price hit 45, but it blew past that in a matter of a couple of hours, and I didn't get out until the price was around 50. I re-entered the position at a price of over 100 in early 2021, and bought back at 120, after losing more money.
Bill Hwang, the Tiger cub, was manipulating the share price in 2021, if that means anything to you.
Anyway now the share price is 1.90. It's worth less. I was dead right on the fundamentals, but lost a butt load of money.
