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SO YOU WANT TO TRADE ONLINE
TRADERS GETTING ORGANIZED
TRADERS LESSON ORDER TYPES
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TRADERS LESSON SELLING SHORT
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When To BUY and SELL
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| Selling Short is it for you? |
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| a simple review of selling a stock short |
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| Simply put, when you sell short your view is that you anticipate a particular stock's share price will drop. To execute this type of order you sell shares you do not own (you borrow shares from your broker to sell).The proceeds from this sale go into your account, once the share price drops to a lower price you repurchase the shares with these proceeds, thereby pocketing the difference. (this is called closing out your short position, re-purchasing the shares to repay your broker for the shares you borrowed). Now let's look at this further with an example: Let's say you think "XYZ" stock for example (currently trading at 55) is going to drop in price. You anticipate this because "XYZ" may miss their earnings estimate when they report earnings, or maybe there is a competitor of "XYZ" that is announcing positive news that may affect "XYZ" negatively. Whatever the case you feel this is a good opportunity to sell short. Now to place a sell short order: On your order entry screen- check off sell, check off sell short, check off limit order and fill in price you wish to sell at. (note; just as you would place a limit order instead of a market order when you buy stock , you would want to do the same when you sell, and sell short) So why would you place a limit sell short order? Ex. say you placed a market order to sell 100 shares short at the open. now the stock closed yesterday at 55, however now at the open the news you were anticipating is out and the stock trades down to 50. Because you had a market order your order gets filled at 50. Now however despite the bad news some traders are viewing this as a buying opportunity and they start to buy, and the share price moves up to 53. Throughout the morning the share price moves as high as 55 as low as 52 but never again as low as 50 the price it traded at the open. Finally the share settles in -3 at 52 for the day. Now while the stock is -3 from yesterday's close you have not made any money, in fact you have lost $200. Why ? Remember you want to sell at a higher price and re-buy the stock at a lower price. You sold 100 shares at 50 at the open, and the stock closed at 52. You could now sit tight and hope the bad news released will move the share price lower in the days to come. But what if an analyst steps in and after further analysis of the company's projections decides to upgrade the stock.....now your stuck with a loss that could progressively get worse if you don't close out your short position. But had you placed your sell short order as a limit order you could of specified a price , say 55? (yesterday's close) Meaning your sell short order would only get filled if the stock traded up to the price you set. In this case you would have been ahead $300 at the end of the day instead of a loss of $200. Note...NEVER place limit orders or market orders prior to the open when the S&P futures are heavily + or - side if you are trading in the same direction. Ex. don't buy when S&P futures are heavily to the plus side....and don't place a sell short order when S&P futures are heavily to the negative or if bad news was released before the open. It is better to wait to see how things settle out before deciding if the move(profit opportunity) has already occurred. Another important key point, if you place your sell short order and it subsequently gets filled, remember to place a protective BUY STOP order to save you from potential capital loss if the stock trades against you and moves higher.(buy stop order- check off buy, check off stop, fill in price risk level you are willing to live with - meaning how high would the share price need to go before you would consider closing out your short position... (please reveiw STOP ORDERS lesson). Some key points: you do not earn interest from the proceeds of the short sale that temporarily go into your account. But unlike a stock purchase you do not get charged interest even though you have used the leverage of your margin account. Short orders are very tricky , so you should feel fairly confident of a continued price decline before you consider placing a short sell order. One last and MOST important point regarding short sell order. Have you ever heard the term "short squeeze", it is an event that happens when a stock in many short sellers view was expected to decline, but for whatever reason starts to rise in price, either from positive news, rumors, or an analyst upgrade initiating coverage. Because of the positive sediment the buyers come in thereby causing the short sellers to protect from losing their capital to close out their short positions. Because closing out a short position means re-purchasing the stock to repay their brokers for the shares they borrowed- this action further enhances the buy side causing the stock's share price to move up even more rapidly. It's important to note that a short squeeze is another trading technique that the analyst, brokerage houses can use to impact share price movement. many technicians can get burned by this. Just when a stock appears overbought ( short positions are high) or another technical indicator shows probabilty of continued selling, and many short sellers establish short positions , this sets up the short squeeze. It is always good to do research to see what short interest your stock is currently at, this way you can determine if the stock your interested in may have neg sediment, as well as what stocks might be prone for a short squeeze. You can also search for stocks that have had their shorts interest decrease as well. Negative earnings as posted at realtime traders pre-announcements
Here's another Short selling strategy - following unlock dates. (as always as with any new strategy, make sure you experiment with mock trades first before going for the real thing) Q:Why is it important to track Unlock Dates? A: As the lockup/restriction period expires, insiders and others become eligible to sell their shares in the market. Since these insiders and others often own a substantial amount of shares, any selling of these additional shares may create a temporary oversupply of the company's stock. Q: How can investors use this information? A: This scenario may create opportunities for investors to profit by selling shares short before the stock unlocks, hoping that the price will drop. Additional opportunities may exist to buy on the dip, hoping the stock price will recover. find the most recent earnings warnings warnings this site offers a calendar list of stocks with upcoming unlock dates. unlockdates.com |
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