Profit Opportunity #1

[powayseller]

I’m afraid to short. I won’t do it.

I believe homebuilders, retailers, and lenders will be down a LOT over the next few years.

But I know there will be rallies inbetween the downs.

The rallies can cause a short squeeze, and the big traders know how to kill a small guy like me.

I won’t take the risks.

I would consider an inverse fund, but don’t know of any that short real estate. The ProFunds is a REIT inverse fund, so that doesn’t qualify.

[docteur]

I have to agree with Chris on this trade in LEND but for different reasons. I traded options and puts for years using technicals and did quite well at it but as the market got more and more saturated with institutional players, I started to lose my simplistic edge and just stopped trading altogether.

I just looked at LEND and my charts tell me that this stock is heavily oversold and possibly due for a rally soon (on a daily chart) but may continue it’s slide in the long run(on a weekly chart). When I was trading and two different time frames conflicted, I didn’t take the trade.

Secondly, regardless of your experience level, I would always recommend going short using puts as opposed to shorting (selling borrowed stock).

Puts limit your downside (loss) to the amount of your investment, increase your upside (gain) through the use of leverage and you never have to worry about getting caught in a short squeeze (which theoretically, could increase your loss infinitely).

“A stock can only fall to zero but can rise forever.”

Lastly, anyone trading the markets (long or short) should use proper risk management and especially when shorting, make sure you have stops in place and know your exit strategies (profitable or not) well in advance.

From an old trader’s perspective, shorting is a lot more scary than going long. Longs can only lose the value of their investment (if the stock goes to zero) but short sellers have unlimited exposure if the stock continues to rise against their position.

So, if you really believe a stock is going to tank within a reasonable time frame, why not use puts?

[North County Jim]

Be careful out there.

lendingbubble,

Do you write for RM?

[Anonymous]

Poway, the logic behind your fear of shorting is completely irrational. On one hand, you claim to be confident that the builder stocks will be down “a LOT” yet you are unwilling to invest any money in that confidence.

You should always set a stop-loss to limit the potential losses, same with a short or a long position. But if you truly believe that the certain stocks will be way down long term, just ride out the squeezes.

[rseiser]

I am flying to Brazil tomorrow, but wanted to post a quick comment. I have now 5 years experience in shorting stocks, and there are many aspects of it with which I could fill about 20 posts. I just want to summarize for the cautious and overconfident: Try and get someone with lots (I mean LOTS, not just 5 years) of experience in shorting, and ask him about all the little details (believe me, there are hundreds). And I would like to meet with him, too. While shorting may work from time to time and seem easy, I would agree that being smart and having a theory is not enough. This is like everyone buying a house during the last 5 years telling you how smart they are, and we all know that it isn’t true and takes quite long to prove them wrong.

[lendingbubblecontinues]

Replying to North County Jim-

No, Jim. I am not a writer. I am sure I have heard others use a similar caution, and simply throw it out there in the sincerest manner for peoples’ protection.

What is “RM” by the way?

[powayseller]

deadzone, how can you ride out squeezes? As the stock price rises, you have to buy it back at a certain point. I think that shorting was much easier 15 years ago, before most trading was handled by computers. The emphasis on technicals has changed shorting from a bet on the direction of a company’s outlook to a casino where computers trade on every little swing, often making a winning idea turn into a loss.

As I said before, even though I am certain that builders and lenders will lose a lot of money, I am not certain that I can make money shorting them, under the conditions prevalent in today’s market. Only because of the way the exchanges work and the sophisticated players.

We haven’t heard from RS. I wonder if he changed his mind about shorting and is getting the put options instead.

[North County Jim]

lb,

realmoney.com

[PD]

I never thought I would short a stock but decided to go short the other day on two homebuilders. I didn’t make a big trade and have no worries about getting squeezed as I won’t be forced to cover the short. I’ll be able to hang in there for the long term. I’m already well in the black on both of them.
I probably should have bought Puts but I haven’t gotten my account approved for options yet. I guess I’m spending too much time on Piggintons!

[Anonymous]

Poway, you can ride out the squeezes by not overleverdging your self. For example, I wouldn’t recommend shorting more than 40% of your account value for starters. Typically you can margin up to around 80% of your account (talk to your broker for the exact formula). So this means that the stock you short would have to literally double in value before you would be subject to a margin call. This magnitude of a short squeeze is highly unlikely from any homebuilder stocks.

Look at the charts of the homebuilder stocks since last Fall to give you an idea of the real world volatility. There are definitely no upward spikes of that magnitude. I recommend following the lead of PD, do a small quantitiy of short sells just to get your feet wet and I think your understanding and confidence will improve.

[Anonymous]

Poway, you can ride out the squeezes by not overleverdging your self. For example, I wouldn’t recommend shorting more than 40% of your account value for starters. Typically you can margin up to around 80% of your account (talk to your broker for the exact formula). So this means that the stock you short would have to literally double in value before you would be subject to a margin call. This magnitude of a short squeeze is highly unlikely from any homebuilder stocks.

Look at the charts of the homebuilder stocks since last Fall to give you an idea of the real world volatility. There are definitely no upward spikes of that magnitude. I recommend following the lead of PD, do a small quantitiy of short sells just to get your feet wet and I think your understanding and confidence will improve.

[RightSide]

LEND is a highly liquid stock it trades $30,000,000 worth of shares each and every trading day. Unless you are going to be short more then $5 Million dollars worth of this stock, you are not going to have any difficulty moving in and out of your position very quickly, literall within seconds.

You can’t get “trapped” in a short-squeeze. You could set a stop-limit to exit LEND say on a close above 60 (which would be a new closing high) and then you have limited the amount you could lose regardless of what the stock were to do.

This is NOT a short term trade and is driven by a fundamental proposition. My thesis is that I believe LEND is going to go out of business due to a rapidly detiorating housing market. If the evidence that supports that thesis changes and the housing market turns back up, then I will exit the trade. If the evidence continues to support my thesis I will continue to increase my short position. I’m looking to be short LEND for at least 12 months, possibly longer.

I’ve got a lot of dry powder in my capital accounts and I will stick with my thesis until its fundamentally proven wrong.

Lets check back on LEND in 3 months and see how things are doing.

[rseiser]

So I guess 1:0 for RightSide. I am also short it since April and will cover some tomorrow.

[Anonymous]

Yes, it was a good day for the “short the housing crash” group. I also have a large short stake in LEND, not sure if I want to cover any of it just yet. In the scheme of things this is just the beginning. As most of us predicted, the subprime lenders will be the next group to hit hard times after the homebuilders. Today the axe officially fell on Wall Street.

I also like NEW and CFC for some good long term short/put action.

[Anonymous]

Great day for LEND short. It was only a matter of time before the subprime lenders would start their freefall and the axe officially came down today.

Also love NEW and CFC for some long term short/put action.

[Author]

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