Tuesday, November 22, 2005
Help me understand this...
As I often do when I think something is overvalued, but I don't really want to sell, I looked at the possibility of selling call options on my position. The December $300 call options were fetching $36 a share, meaning I could realize a further 15% gain if I sell the calls now and Google shares are above $300 in December. Then again, I could just sell some shares, even recouping all of my initial investment. One savvy friend of mine recommended selling a third of my position outright, selling covered calls on a third, and holding a third, which strikes me as a prudent course.
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The majority of investors use shorts to hedge. This means they are protecting other long positions with offsetting short positions.
If I lost money in short sells, does anybody make money?
Short squeeze: If a stock starts to rise and a large number of short sellers try to cover their positions at the same time, it can quickly drive up the price even further. This phenomenon is known as a "short squeeze." Usually, news in the market will trigger a short squeeze, but sometimes traders who notice a large number of shorts in a stock will attempt to induce one. This is why it's not a good idea to short a stock with high short interest. A short squeeze is a great way to lose a lot of money extremely fast.
Momentum is a funny thing. Whether in physics or the stock market, it's something you don't want to stand in front of. All it takes is one big shorting mistake to kill you. Just as you wouldn't jump in front of a pack of stampeding bulls, don't fight against the trend of a hot stock.
Still, regulators have introduced rules that make it more difficult for short sales to push a market downward. We already mentioned one of these regulations, the uptick rule, where a short is prevented unless a stock is trading up.
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