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Gold/Mining/Energy : Solv Ex (SOLVD)
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To: Joan Osland Graffius who wrote (3205)5/31/1997 9:50:00 PM
From: Dominic Cerino   of 6735
 
Joan,

Shorting against the box is not the only way a short sale never has to pay taxes. If the short sale stock goes to zero or pennies that person never has to close out the position, thus never having to pay taxes. Most of the time when a high priced stock falls below $2 there is no margin position left to allow a short to keep his position, meaning the stock he borrowed was called back because the person on margin was sold out or paid off his margin debt and placed the stock into a cash account. A smart short gets around this by purchasing the stock long in his cash account and delivering those shares to satisfy the delivery of the stock that he borrowed. His margin account that he has his original short position in then can stay open forever and that person then gets the full benefit of his buying power or can take out the available cash. A naked short, who never borrowed the stock must still satisfy a delivery but he gets an extra cushion of time because he has no deadline based on the price of the stock for the person that is under margin pressure. The naked short can wait until the stock is trading for pennies before he buys in his cash account to satisfy the delivery.

The added benefit of not paying taxes makes it very lucrative for shorts and naked shorts to target certain companies that they believe to be vunerable to a complete kill, thus they are labeled a "Terminal Short" and will go to extreme measures to ensure the kill.

Regards,

Dominic
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