![]() ![]() Pros And Cons Of Short Selling – Why Is It Difficult?.We have covered short selling in separate articles: Additionally, the price of most assets over time goes up so you are facing a headwind when shorting. Short selling is difficult because you can only make 100% while the losses theoretically can be unlimited. ![]() In early 2021 the share price went from 5 to 80 dollars! We can assure you those who were short could really feel the pain of this move. Here is a short squeeze example in Gamestop (GME): This scramble to buy the stock further pushes the share price up, and there’s no fundamental limit to how high the stock could climb as brokers initiate margin calls forcing shorts to buy to cover. Assuming there are many short sellers who want to buy back shares before they lose even more money as the stock rises, they would have to compete with each other in a sense, because others are also clamoring to get rid of their stock. Since the short sellers would have to return those borrowed shares to the lenders, they would need to buy back the shares at a higher price. However, instead of the share price dropping, it rises to $65 and keeps rising, probably following a better-than-expected earnings report. Let’s say some investors believe that stock XYZ is overvalued at its current share price of $50, and they borrow other’s shares of the stock and sell (short selling), with the hope that the share price would drop to say $30. Short squeezes can make short sellers lose a lot of money on their trades because unlike price declines, which are capped when the share price reaches $0, price advances theoretically have no limits. That said, these painful moves are, in general, pretty rare. Thus, short sellers add fuel to the fire and make short squeezes extremely painful for those short. – Victor Niederhoffer, The Education of A Speculator, page 267-268.Ī short squeeze is when a heavily shorted stock’s price goes up instead of down, forcing the short seller to exit their positions by buying back the shares at the new higher price so they can return the borrowed stocks, thereby enduring heavy losses. Really took some of those midwestern hayseeds to the cleaners.” Wink replied with a chuckle, “Oh yeah, we had some fun squeezing the shorts on that one. As we talked, I blurted out something about “The biggest boom and bust cycle I’ve ever seen in a stock was in Hoe”. One day, shortly after the Hoe debacle, I was moping along Broadway when I ran into Wilton (“Wink”) Jaffee, and old Wall Street hand and a veteran of many campaigns. I lost the entire initial $25 000 stake plus $50 000 more….A month after we closed out our position, RH Doe declared bankruptcy. I covered the last of my position between 90 and 95. It was too late, however, a major bear squeeze was on. Over the next few weeks, I watched the stock trade up to 20, then 30, then 40, finally breaking through 50….But when the stock climbed past 50, I started to cover, unable to stand the pain. I signed my first client and proceeded to short my first stock. Short squeeze trading strategy – ending remarks. ![]()
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