Getting on the same page RE selling short...

Here I am again to enlighten one and all.


When you sell short, you are in a sense borrowing some stock, and then selling it. You are taking out a loan, the only exception being that you borrow stock instead of cash.


After you sell the stock that you borrowed, you must obviously return it later - IE purchase it.


You can never possibly get rid of selling short - all I have to do is find someone willing to loan me his shares of stock (a service for which I would pay interest, whatver), sell it legally, purchase the stock at a later date, and return it to him. To make selling short illegal, you MUST make each of those steps illegal, and that will never ever happen.


It wouldn't make any difference anyway - you could still purchase PUT OPTIONS and effectively accomplish the same thing.


More on that later.....

Instead of this:


'To make selling short illegal, you MUST make each of those steps illegal'


I meant to say


'To make selling short illegal, you MUST make at least one of those steps illegal'

Another way to profit from declining stock prices is to pruchase PUT OPTIONS.


Let's say that a stock is trading at 50. You 'know' that the stock's value will decline. You can purchase options to sell the stock at a lower value, say 45.


Now, why would you want an option to sell a stock for less than it's worth now, you ask? Because if the stock drops to 40, your option to sell at 45 will definitely be worth something. Then you sell your put option at an increased price.


CALL OPTIONS are related -


With call options, you buy options to purchase a stock at, say 55 when it is trading at 50.


Buying options to purchase a stock at a higher value than it currently is sounds dumb, but remember that if the stock rises to 60, you will have something.


THis is how Sklansky got torched for several tens of thousands of dollars (or more, knowing him) by this Shufflemaster fiasco. But I'll leave that for him to elaborate.

The last post shows that, if you feel you have to outlaw selling short, you also have to outlaw put options.


Now I will show you something else you'd have to outlaw.


We talked about options. Now everytime someone buys an options, they must be buying it from somewhere, right?


When you WRITE a CALL OPTION, that means that you are selling someone an option to buy your stock. (Note that you don't actually have to OWN the stock to write the option!)


Let's say you are on the board of directors for Shufflemaster. You know the stock is going to go down, but you can't sell your position in the company because you don't want to lose your seat on the board. (Note that you'd have to be careful not to get thrown in jail for insider trading!)


You can write put options for the stock. Let's say it's trading at 50. You believe it will go down. You sell options to buy your stock at 55. Someone who believes the stock will go up will buy it.


As the stock goes down below 50, the options become worth less and less as the prospect of the stock reaching 55 becomes more dim.


You must note that all options have expiration dates - all options that have not been excercised or cancelled out by the expiration date are worthless.


After you write the options, if no one ever excercises those options by the expiration date, you get to keep the money. No further obligation on your part.


You can also cancel your obligation by purchasing options of the same nature that you initially wrote. Now they cancell and you are finished with it.


THE POINT - if you want to stop people from profiting when stocks decline in value, you must abolish both put AND call options since both can be used to profit from a declining stock market.


As always, I'm happy to help tear down the barriers of ignorance to help make the world a better place.

I'm guessing I missed another thread. Why would you want to outlaw selling short? Say an American company has committed to purchasing an expensive piece of equipment from a Japanese manufacturer. This piece of machinery will be ready in 6 months and the agreed upon price is X yen. Well, if the yen's value inflates well above X over the next 6 months, the American company has taken a great risk by not shorting future yen. The same can be said for the Japnese firm should yen decline in value. Bottom line: You CAN'T outlaw short selling...

actually you are borrowing the stock, but not taking out a loan. you really are putting up cash to someone who should give you interest on the short sale. you are doing the lending kind of.


most of the short selling that happens is done by the specialists as they have to short sell to make a market. they dont always have the stock that one puts an order in for. also when transacting odd lot sales , a short sale may be the way it gets transacted as its not easy to find small lots to buy or sell so the short sale can be made to make up for the lack of shares..

Analyst, to more fully educate you should point out that when a person is long, the most they can lose is 100% of their money, BUT if they are short, the there is basically no limit to the loss.


Now if you can just teach us how to know which stock and when????