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To: levy who wrote (10970)	8/7/1999 12:49:00 AM
From: Sarkie	Respond to of 28311

Hey everyone, I read a response by V. to sandintoes regarding a question on shorting and puts. This was such an excellent and well written response that I feel it should be re-posted here, on this thread for everyone to see and to benefit from. First the question From: sandintoes Friday, Aug 6 1999 9:36AM ET I've decided to ask this question over here as I've already had one OT on the other board, more than that I'm sure, but one more today, and they will start beating me over the head. My question is; What is the difference between shorting a stock and buying puts? ....and now, the answer To: sandintoes who wrote (468) From: V. Friday, Aug 6 1999 10:07AM ET Shorting a stock is when you borrow shares from your broker and sell them on the market hoping to be able to redeliver those shares to your broker at a lower price. The difference between what you sold them for and what you buy them back at is your profit or loss (plus commissions). Shorting carries an infinite loss risk as once you sell short, the stock could theoretically go up forever thus forcing you to buy back the shares you sold at a much higher price. Also, remember that you could be subject to a margin call on a short position if the stock moves against you (goes up) too much. A "Short Squeeze" can occur when many people have borrowed shares from their brokers and have shorted the stock. (There is a "high short interest" in the stock.) In this case, brokers can "call in" the borrowed shares and those who are short the stock must immediately purchase shares on the market to return to their brokers (or the broker will do it for you, i.e. margin call ;). Naturally, this could cause the stock price to increase due to great buying pressure and the shorts are 'squeezed' into buying back shares at inflated prices to cover their short positions. I might add here that shares are loaned out by brokerage firms from others' margin accounts. When shares are held in a margin account (vs. a cash account), the investor is giving the brokerage permission to loan out those shares to others. This is why some people have commented on the GNET thread that they transferred their shares from margin to cash... this prevents their brokers from loaning out their shares to be shorted in theory. Buying puts is an options strategy in which you purchase (go long) a put option. Put options increase in value when the stock goes down. Though puts do not typically move point for point with the underlying stock (and they tend to move less the more 'out of the money' the strike price is), they will appreciate in value as the stock moves down. A long position in a put option (buying a put or 'going long the put') is a contract in which you wish to reserve the right ('the option') of selling shares at a particular price which is called the 'strike price' at some time in the future (prior to the 'expiration date' of the option). Conversely a call option is a contract in which you reserve the right to buy the underlying shares at a particular price prior to expiration. The value of a call option increases as the stock goes up. With puts, the loss risk is limited to the purchase price of the option (called the 'premium') plus the commission. Even if the stock moves 100 points higher ('out of the money'), your risk can not exceed what you paid for the options. In this scenario, when the option contract expires (on the 'expiration date'), the put option would expire worthless (have a bid of 0). You can close your options position at any time prior to expiration buy selling your put option. You do not need to own any underlying shares to trade options, though many use puts as an insurance policy against their long position moving down when they want to make money on downswings while holding their long positions. To be able to trade options, you must be able to withstand the inherent risks involved. Though your risk is limited more with put options than outright shorting the stock, options are very dangerous for many investors who lack trading discipline, experience, and/or adequate funds to cover their positions. Shorting stocks is not something that ought to be attempted unless the trader can watch the position closely, IMO, and short positions are very risky as well given the unlimited loss potential. Hope this helps. :)

To: levy who wrote (10970)	8/7/1999 1:23:00 AM
From: Hawkmoon	Read Replies (1) \| Respond to of 28311

Levy, Yeah I was kinda thinking the same thing, but I just was taught an interesting lesson on M2 by a fellow SI member who seems to know his business. briefing.com briefing.com As you can see, the M2 monetary growth rate has been growing slower since the first of the year and I think this has been A Greenspan's way of trying to push the heavy margin players out of the market and creating some measure of rationality in the markets. So as my learned "instructor" has advised me, inflation fears are being exaggerated because there is less money out there, thus less liquidity and that is increasing the spreads and pushing down the yields on the bonds. It possible the Fed is preparing to increase liquidity gradually as we draw closer to Y2K and that should help the bonds and the stocks, but not before you get the bejeezus frightened out of us. Any other opinions? Regards, Ron