Grant, Per your post: "I again want to short AMZN, but I go to a mom and pop broker down the street who
refuses to let anyone go long on AMZN because it is an "internut" stock. This broker
therefore has no position in AMZN and has no shares to let me borrow. BUT, they let
me short AMZN anyway, going naked. Now, Joe Medesker and pals own lots of
AMZN and call back in their certs. Why do I care? They can't call my certs in. I'm not
borrowing any stock with a cert. Does anyone even know that I'm short AMZN
through this mom and pop broker? Can't I just sit here forever on my 5 shares short
unless AMZN gets bought out or its CUSIP changes?
I don't claim to be an expert on this, but will take a crack at answering your question. If others see any errors please correct them for me:
Let's assume from your above example that AMZN has 20 million shares outstanding and in the float to make this simple. Now let's say that when you were making your naked short, the "0" key got stuck and you found yourself short 10 million shares, 1/2 of the total outstanding/float. This means that at that point in time, long shareholders would actually own 30,000 shares in a stock where only 20 million physically existed and Joe Medsker and his "pals" owned all 30 million of those shares. One day, Medsker adds up the known positions and realizes that there must be a HUGE short position in this stock and organizes a cert. call. Because some people for whatever reason don't get around to helping the cause, by making 1 phone call and calling their own certs., only 2/3 of the total outstanding/float is called in, which amounts to 20 million shares. Theoretically, this condition could exist, but there would be 0 free shares. Joe Bob, who is an avid AMZN shareholder and just returning from vacation, gets one of Medskers emails explaining how the cert.s call could help us with our share price and being a loyal shareholder he calls in his certs. Now YOU as a naked short have a problem because the transfer agent cannot not send out any more shares to Joe Bob, because there aren't any left. As I understand the process, the transfer agent would contact your brokerage house and demand delivery of share certificates, which as a naked shorter you do not have. Your only recourse is to go on the open market and buy the shares your broker is requesting. Now suppose that Joe Medsker and his group knew that in just a short period of time that they would be getting $10/share and they just were not interested in selling at the current market price of $2.80. You would have to continue raising your price until you were able to buy the shares you needed. It's obvious that at this point, every single share called in, would result in a "call" and is reason that we need the support of as many DCI shareholders as possible. The fact that we have been seeing strong price movement with a bit over 4 million shares called, indicates to me that our short is HUGE. Could we be already be at the point that this group is being squeezed?? If so, then every single additional share called helps us big time. Now consider something else. If brokers know that there are not any free shares to borrow in DCTC, do you think that they would allow a group to expand an already large short? After all, as I understand things, the brokerage house is ultimately responsible if the client does not have the $$ to buy the shares needed... If our shorters become unable to do any additional shorting, then we effectively remove their ability to hold us down any longer.
One last thing. We don't know the exact size of our short (though my guess is still that it is over 10 million shares), so we don't know exactly how well the cert. call will work until that avenue is fully explored. The preliminary results however appear promising. It is obvious IMO that we stand to potentially benefit significantly by helping the cert. call, but if we are wrong and it does not help, what has it hurt us to give this a really good chance to work?? It cost me $15 to call my certs. and 1 phone call. Many brokerage houses have no charge at all. Lots to gain potentially and nothing to lose...why not help??
James |
