Anthony @ Equity Investigations, Dear Anthony, Message Board

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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony,

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To: SI Dave who wrote (91047)	3/26/2005 6:37:58 PM
From: RockyBalboa	Read Replies (1) of 122088

Though many comments have been posted earlier (which I've read only in part), some more thoughts on it: Shorting naked is much like selling a stock future. If I for example sell an AMZN future (or any other single stock future), no one asks me whether i can borrow the stock or not, not today, not tomorrow and not in 2 weeks. At the expiry date I may elect to roll the contract over or buy it back (delivery might be a theoretical option, but currently less than 1% of financial futures are delivered on expiry). As you said i simply enter into a contract to deliver something in the future with no settlement need today or tomorrow or in 3 days. The good I have to deliver may exist (like in common stocks) or not, as in most commodity futures where the crop needs time to grow until the declaration date or the hogs ain't slaughtered yet. Yet some differences may exist: when i sell a futures contract, i enter into a liability with a defined amount of goods to be delivered at a certain date and with a certain price (this plays in particular a role in currency or interest rate contracts). In selling short a stock there is much less of a definition - be it naked or with a borrow, in both cases the open position or the stock loan is "on call", much like an american stock option which can be exercised long before the expiry. Yet this difference is again pretty meaningless, as a futures contract can be rolled over again and again for an indefinite time. But remember - the delivery or "call in" issue is not something which distinguishes selling short with a borrow from selling short naked. In both cases the holder of the short position faces the same risk of not being able to maintain a position on a continuous basis. The embedded optionality is something which does not go away easily: the buyer of a stock can demand delivery of the cert; the seller of a stock is obliged to do so on call. All said, the issue seems to boil down to contract law and proper documentation. Free enterprise yes, religion no.

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