Making Moeny through Short Selling Making Money Selling Short

                                          How to Make Money through Short Selling

The best way I know about how to make money through short selling is to not do it! Instead, take the money you were going to risk on a short sale and buy a mutual fund of quality stocks. Selling short is for professionals only. Rookies need not apply unless they have a pending death wish, for getting “killed” they will by attempting to short anything.

I have been in the equity and options business since 1975. I did not sell a stock short until 1983! The reason I took so long to short a stock is that I knew the risks doing so were quite large and the knowledge of the short selling process was extensive. I just was not going to allow myself to wade into unknown and dangerous territory until I had a good feel and excellent knowledge for the situation. Granted, since 1983, I have literally shorted hundreds of companies and shorted literally hundreds of Thousands of shares of their stocks. My profits doing so are in easily in the six digit range. Most of those short sales were profitable, some miraculously so. ALL of those short sales involved doing something the average Jane or Joe fails to do when shorting—they were hedged by long calls.

All short sales should be hedged. Almost all professionals short stock with a hedge in place. Doing so limits financial damage. The cost of hedging the position via long calls is quite small.  I do not know of any professional, now and or whenever, who does or did not short a stock combined with a hedge of being long calls on that stock (or some other type of hedge).

I suppose I could write some lofty article about how shorting stock is the way to untold riches, but doing so would make me ill. The public in general, those who play the stock market game, begin to think about shorting stock just when it is time to start buying stock. The reason for that dopey reasoning is that the public tends to do the wrong thing at the wrong time because doing so seems to be safe and because doing so is getting popular in the media.

Believe it or not, the best time to short equities is when the stock market has left the stage of euphoria and the word “hope” begins to show up in the financial press and/or out of the mouths of so-called experts. Hope is the ideal emotion where you will find overpriced equities without much chance of them living up to their expectations. That is the perfect recipe for a short sale. In addition, the chart should show via the slow stochastic line patterns that the faster line has crossed over the slower line when these lines are at the top of their sine wave cycle. Do you homework on any potential short sale to make sure it fits these important criteria, or if not, wait to see if this setup occurs sometime later.

The public today does not have to short stock in order to gain from an equity sell-off. They can simply buy an ETF that offers this strategy as their one and only goal for their investors. Some of these ETFs offer double or triple the move of the underlying equities in their portfolios, but beware as that also implies double or triple the risk involved.

If after all of this has been read and understood, yet you still want to plow ahead and short a stock, then please buy protective calls on that stock in order to keep you from putting yourself in a situation where you have Unlimited risk. Any stock shorted can theoretically go to infinity. It won’t, but at times it can seem that it is doing so if you shorted the wrong stock at the wrong time. To quote Robert Stovall of “Standard and Poors” fame, “Selling a soybean contract Short is worth Two years at the Harvard Business School!” I would say “shorting anything will make you wiser and probably poorer!” However, you do stand a chance of success if you follow my rules for shorting as espoused in this article.