Hi Rich; Leroy explained it fairly good, I might add not only do
the MM and brokerage houses short, they have a keen eye on how many
"outsiders" short, and what the "buy stops" are , and will buy it
up to trigger the buystops. This is a cinch for them, if they
see 1m shares with stop losses "buy stops" sitting at 72, and the
stock is 68, they start buying at 68, and do it faster than sellers
can show up, so they may only have to buy 1/2 M and they have it to
72, here they know they have ready made buyers..will dump that 1/2
M right back to the outsiders, and can short the other 1/2 at the
new top. They continue to stay on top with their short positions,
and as long as a bunch of "outsiders" short they can run it up,
that is why if you follow "short interest" you will find the stock
falls when about 50% of the shorters are wiped out and gone.
You have to short when only the MMs are shorting, and that's hard
to figure as we get the data late.
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A Big aspect Leroy did not cover, is lets say on the BRE-X fall
and you may have been one of the lucky ones and shorted it at
15 or 20...you see it falling to china..looks like your going
to clean up..she is going down to $2..let me tell you , long
before she gets down to $2 "you get bought in"...as the thing
sells off at a fast rate the "available shares to short dry up,
and most of what is out gets called in" just as soon as the shares
start getting scarce you are bought in, so you call the broker the
next day to cover and tell him to BUY to close at $2, and he
explaines to you that you already Bought at $10 or maybe $12,
as the shares were called in..of course if the firm was short they
will be the last one to have to cover. In this respect if you expect
a really BIG drop, if you used puts, then you could ride her all
the way down..as you have the right to "put" shares to who ever
wrote them at what ever the strike price was.
Shorting is OK in a limited way, ( if you have calls to cover your
rear to avoid the jack ups to the "buy stop" level, and you are
looking more for a correction than an out and out crash, often
this is a cheaper way to go, than buying "puts" but if your looking
for the BIG one, "puts" keep you from getting bought in by the
broker when the borrowed stocks get called. Don't think for a min
if you short AOL at 70, that you will have a chance to ride her
down even to 50, they will call the shares before that, likley at
60, only the big boys will ride her on down.
Jim |
