Online trader begs for help after his short goes south

[jmowreader]

29. Time frame? There really isn't one

First, I must apologize: Shorts have to place collateral of 102 percent of the previous day's closing price on the stock they short, and some of them use margin (it is a line of credit with a LOT of rules) to do it.

Guys like our friend at the top of the list tend to hold their short positions open for hours or days...but there are people who hold short positions for YEARS. There are quite a few fees involved. First is collateral, which we discussed in the previous paragraph. Then there's a borrow fee, which is a percentage of the stock's closing price the day before you short it. The actual number depends on how hard it is to borrow the stock - if you want to short General Electric, the fee will be reasonable because there's a ton of it out there and the price doesn't move much; if you want to short Shake Shack - assuming you can at all; a lot of people want to short SHAK and the shares to do it with just plain ain't there - the fee will be outrageous. If the company whose stock you're doing the Vegas thing with declares a dividend, you have to pay the amount of that dividend to the firm you borrowed the stock from. (On the flipside, when you sell the stock at the start of the short the proceeds from that sale will be deposited in your brokerage account, and it'll draw interest.)

Where this guy fucked up is he didn't use the most basic investment safety techniques. When you decide to short you need to decide how much risk you can handle, how many fees you want to pay and how much reward you expect. Let's throw out a real easy short: 10,000 shares of a $20 stock with a 5 percent borrow fee, and you paid the collateral in cash because everyone has $204,000 collecting dust in the bank, right? The borrow fee is on an annual basis, so a buck a year per share of stock. You want $5 per share reward, you can handle $2 per share risk, and you want to pay no more than 50 cents per share in fees - which means you will cover the short no more than 183 days after you open it. When you enter the short contract you need to issue either two or three buy-to-cover orders, which are how you close a short. The first one executes 183 days from issuance regardless of price. The second executes if the stock hits $22, and the last if the stock hits $15 - this one is optional; if you think the company is on a death spiral you wouldn't buy this. When one executes the others are canceled. Conditional BTC orders cost money but it's not much. Our buddy didn't issue any of these and, as you can see, he really should have.

There is a special class of investor, the "accredited investor." If you're an individual and you want to be one you have to be worth at least $1 million, not counting the value of your house. (The theory is, a lot of high risk investments also require high investment sums, and they don't want people who really can't afford to play in Twelve Percent Land to lose their asses and bring down the system.) Only accredited investors can get into the seriously risky shit like hedge funds. I'm really shocked the SEC doesn't require shorts to be accredited investors, but they don't.