scottrade trying to take back my short-sold stocks

[nostradamus]

So I have several short positions on the stock market, and today Scottrade called me saying they can no longer “borrow against” my short sales (meaning they want me to buy to cover now).

Can they force me to do this? Isn’t it illegal? Help! Those short stocks are making me some real money now. Has anyone heard of this?

[Coronita]

Not the most eloquent articles. BUT..

http://www.unstrung.com/document.asp?doc_id=16808

 

Something else to consider is the "buy-in." Remember that you borrowed 100 shares from a margin account. If the client of this account decides to sell the shares, then the broker will need to get a borrow from someone else. If this is not possible, your broker has the right to force you to cover your short position. Sounds kind of harsh, huh? Well, when you sign a margin account, there is a clause in the agreement that gives this powerful right to your broker.

 

Also,

http://www.fundlibrary.com/features/novice/page.asp?id=10316

Most of the time, you can hold a short for as long as you want. You can, however, be forced to cover if the lender wants back the stock you borrowed. They can't sell what they don't have, and so your brokerage will have to either come up with new shares to borrow, or you'll have to cover. This is known as being "called away." It doesn't happen often, but is possible if many investors are selling a particular security short.

 

I've always been puzzled with folks saying I'll short to "0". Personally, I never short for a long time. Anything between -15 to +20% is already pretty good in my book.

[nostradamus]

Thanks FLU. That’s exactly what’s happening to me. I guess all the big fish decided they want to short sell this particular stock so they’re gobbling up the little guys’ shorts (eating my shorts). It’s Meritage Homes (MTH) and in my conspiracy nut ways I think we can expect them to crash down very soon.

[Coronita]

If you really believe a crash is eminent, you could buy put options. But the issue is you're dealing with your prediction plus the option premium/expiration date.

As I read more and more, I see why some folks think that shorting a stock has some upstream currents. Not saying you shouldn't short, but definitely there are some cards stacked against you. 

Good luck with whatever you decide to do.

 

 

[Eugene]

You can also short entire indices (DOG) or industry sectors (SKF) via bear market ETFs. Upside isn’t that great, but (unlike put options) you don’t lose much if you’re wrong, and (unlike short stocks) your losses are capped.

Before shorting anything – keep in mind that the Fed will likely keep cutting rates. You have two effects working against you. First, lower rates -> more irrational exuberance -> higher stock prices. Second, lower rates -> more money being printed -> inflation and weaker dollar -> higher prices and higher profits -> higher stock prices. Especially stocks that would otherwise go down (e.g. CAT) may end up doing the opposite, thanks to the Fed.

[Coronita]

esmith,

 

I think the original poster was talking about the particular stock, not an entire market. As far as reverse indexes, we all know what currently things are with those.

 

[nostradamus]

I pushed back a little with scottrade and they told me I don’t need to cover-buy back the shares! Probably their inventory increased.

[nostradamus]

I pushed back a little with scottrade and they told me I don’t need to cover-buy back the shares! Probably their inventory increased.

[Coronita]

esmith,

 

I think the original poster was talking about the particular stock, not an entire market. As far as reverse indexes, we all know what currently things are with those.

 

[Eugene]

You can also short entire indices (DOG) or industry sectors (SKF) via bear market ETFs. Upside isn’t that great, but (unlike put options) you don’t lose much if you’re wrong, and (unlike short stocks) your losses are capped.

Before shorting anything – keep in mind that the Fed will likely keep cutting rates. You have two effects working against you. First, lower rates -> more irrational exuberance -> higher stock prices. Second, lower rates -> more money being printed -> inflation and weaker dollar -> higher prices and higher profits -> higher stock prices. Especially stocks that would otherwise go down (e.g. CAT) may end up doing the opposite, thanks to the Fed.

[Coronita]

If you really believe a crash is eminent, you could buy put options. But the issue is you're dealing with your prediction plus the option premium/expiration date.

As I read more and more, I see why some folks think that shorting a stock has some upstream currents. Not saying you shouldn't short, but definitely there are some cards stacked against you. 

Good luck with whatever you decide to do.

 

 

[nostradamus]

Thanks FLU. That’s exactly what’s happening to me. I guess all the big fish decided they want to short sell this particular stock so they’re gobbling up the little guys’ shorts (eating my shorts). It’s Meritage Homes (MTH) and in my conspiracy nut ways I think we can expect them to crash down very soon.

[Coronita]

Not the most eloquent articles. BUT..

http://www.unstrung.com/document.asp?doc_id=16808

 

Something else to consider is the "buy-in." Remember that you borrowed 100 shares from a margin account. If the client of this account decides to sell the shares, then the broker will need to get a borrow from someone else. If this is not possible, your broker has the right to force you to cover your short position. Sounds kind of harsh, huh? Well, when you sign a margin account, there is a clause in the agreement that gives this powerful right to your broker.

 

Also,

http://www.fundlibrary.com/features/novice/page.asp?id=10316

Most of the time, you can hold a short for as long as you want. You can, however, be forced to cover if the lender wants back the stock you borrowed. They can't sell what they don't have, and so your brokerage will have to either come up with new shares to borrow, or you'll have to cover. This is known as being "called away." It doesn't happen often, but is possible if many investors are selling a particular security short.

 

I've always been puzzled with folks saying I'll short to "0". Personally, I never short for a long time. Anything between -15 to +20% is already pretty good in my book.

[Author]

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