Shorting stocks

[benchmark]

Is shorting stock a bad idea in general? For example, LinkedIn seems to be a primary candidate for shorting, purely based on valuation.

 

Moderator, feel free to delete the post if it's been discussed already.

[JBird]

You can be totally correct about a short thesis and be forced to endure a lot of agony before you make any money out of it.

[nkp007]

Also traditional shorting is not asymmetric. Upside is limited.

[CorpRaider]

I personally have only bought put options.  Shorts theoretically have infinite loss potential.  That doesn't work well if you plug it into the kelly equation.  hah!

[benchmark]

You can be totally correct about a short thesis and be forced to edure a lot of agony before you make any money out of it.

 

I'm finding that to be true :)

[benchmark]

Also traditional shorting is not asymmetric. Upside is limited.

 

Are you referring to the fact that the loss could be unlimited?

[Uccmal]

I think you need to separate traditional short sellers from short sellers who deliberately catalyze a position such as Muddy Waters, or Jim Chanos, or Ackman. 

 

My understanding is that traditional short sellers try to grab a falling knife on the way down, not on the way up.  Linkedin, while obviously overvalued, has earnings, capital, a brand, and upside earnings potential. 

 

You need a company that has nothing there to hold its stock up.  Linkedin has 1 billion in cash as of 6 weeks ago, and essentially no debt.

 

So, how do you set your target to buy the shares you sold short:  $50, $100, 150?  What's fair value for LinkedIn? 

 

I have a hard enough time setting upside sell targets on value stocks.  Should I sell my shares of BAC at 16, $20, $24?  And I have already made 100% profit to date on the aggregate position. 

 

Seems like torture to me unless you can identify and publicize a catalyst.  LinkedIn is overvalued doesn't seem like a sufficient catalyst to me.  The difference between Facebook, Google, LinkedIn, and Netfilx, versus .coms of 13 years ago is they they have viable businesses with real revenue and cash flow. 

 

 

 

 

[sethatk]

If I have learned anything it is that shorting is not for me.

[nkp007]

Also traditional shorting is not asymmetric. Upside is limited.

 

Are you referring to the fact that the loss could be unlimited?

 

That upside is limited to 100% through traditional shorting. If it goes to 0, you double your money.

 

Unless you use options / CDS. But those are time-constrained and may be priced at a premium if what's obvious to you is obvious to other people.

[benchmark]

I think you need to separate traditional short sellers from short sellers who deliberately catalyze a position such as Muddy Waters, or Jim Chanos, or Ackman. 

 

My understanding is that traditional short sellers try to grab a falling knife on the way down, not on the way up.  Linkedin, while obviously overvalued, has earnings, capital, a brand, and upside earnings potential. 

 

You need a company that has nothing there to hold its stock up.  Linkedin has 1 billion in cash as of 6 weeks ago, and essentially no debt.

 

So, how do you set your target to buy the shares you sold short:  $50, $100, 150?  What's fair value for LinkedIn? 

 

I have a hard enough time setting upside sell targets on value stocks.  Should I sell my shares of BAC at 16, $20, $24?  And I have already made 100% profit to date on the aggregate position. 

 

Seems like torture to me unless you can identify and publicize a catalyst.  LinkedIn is overvalued doesn't seem like a sufficient catalyst to me.  The difference between Facebook, Google, LinkedIn, and Netfilx, versus .coms of 13 years ago is they they have viable businesses with real revenue and cash flow.

 

I agree that LinkedIn is a real company with real earnings, but it's only growing at 60-70% y2y, using forward earning, it's trading at about 500+ PE. The short thesis is purely based on rich valuation. At some point, the growth will slow, and the stock will follow, though I don't know when.

[meiroy]

Also traditional shorting is not asymmetric. Upside is limited.

 

Are you referring to the fact that the loss could be unlimited?

 

That upside is limited to 100% through traditional shorting. If it goes to 0, you double your money.

 

Unless you use options / CDS. But those are time-constrained and may be priced at a premium if what's obvious to you is obvious to other people.

 

Considering you are not using your own money to short the possible upside is far greater than 100%, perhaps it can be compared to the initial margin used? In addition, you can use the funds from the short to reinvest in a long which means an infinite upside, with other people's money ;)

 

[JBird]

Considering you are not using your own money to short the possible upside is far greater than 100%, perhaps it can be compared to the initial margin used? In addition, you can use the funds from the short to reinvest in a long which means an infinite upside, with other people's money ;)

What broker is allowing you to use proceeds from short positions to initiate long positions?