*Really* bad week for SCO

Drew Hamilton awh-z32R3RYGf1M at public.gmane.org
Tue Dec 9 00:32:00 UTC 2003

On Mon, Dec 08, 2003 at 07:11:57PM -0500, Ian Goldberg wrote:
> Shorting a stock is trivially easy.  Just go to your friendly online
> broker website, and sell some.

Assuming, of course, that you have a margin account and are approved
for short selling.

> [Note: not all stocks are allowed to be
> shorted, but I don't think SCOX is one of them.]

In Canada, I think that the IDA rule is that stocks less than about $3.00
can't be shorted.  Of course individual dealers are allowed to set their
rules to be more restrictive than the IDA's.

> But if instead, unbeknownst to everyone, SCOX has been using the lawsuit
> as a smokescreen to hide its super-secret research efforts into
> real-time widget operating systems, and announces the Best Thing Ever (TM),
> its stock price may jump to $50, and if you hold -100 of them, you'll
> now have to pay $5000 to close out your position, and you're in the hole big
> time.

Yes.  The problem with short selling is that there is a (theoretically)
infinite exposure, and a maximum possible upside.  With your original
example, the maximum possible upside is the $1500 that you short-sold the
stock for, since the stock price can't go negative (no matter how much some
people on this list may pray).  But theoretically the stock price could rise
to infinity.  

This is why, if you're bearish on a particular stock, it may be better to buy
put options.  At least your loss is limited to the market value of the puts at
the time of purchase.  That said, the put options would have greater price
volatility than the actual stock.

  - awh

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