Another way to use short sales is in a hedged situation. These are hard to find, but for instance....
Several months ago, I was able to buy QUST at $8 and QUSTP at $8. QUSTP is a convertible preferred with a mandatory conversion feature. The company must exchange each share of the preferred for 1.45 (I think it is) shares of common in March of 1998. Thus, for each 100 shares of the QUST-QUSTP combination, I will end up with 45 shares of QUST in March at essentially no cost (other than trading commissions and margin interest for the shorted shares).
At the time I bought, the numbers worked out to a profit at anything above about $1.50 for the common stock in March 98.
I understand that this is done a lot by offshore placement people who buy shares or warrants convertible at some *unspecified* price. They then sell short the base stock, betting on running the price down and covering with the shares they get through a warrant conversion at some time in the future. And the lower the base stock goes, the more shares they get upon conversion. In some cases, this has resulted in the warrant holders being entitled to more shares than exist -- which leads to a lot of unhappiness as the warrant holders squeeze out the previous equity holders.
Needles, to state, one item I include on my DD is to make sure that there are not unsupported convertible issues out there which could squeeze me out. |
