short is a strategy for making profits on the decline
of an individual stock. The short-selling investor initially
borrows stock from the broker/dealer, then sells the stock
into the market. The trader anticipates that the price
of the stock will go down enough to allow him to replace
the borrowed stock at a lower price at a later date. The
seller is obligated to buy the stock and replace the borrowed
shares in order to close the short position. If the price
does decline, cheap stock is bought to cover the short
sale and close out the position at a profit.
is realized when the security is re-purchased (buy
to cover) at a lower price. However, this strategy
exposes an investor to an unlimited loss should the
security rise in price.
market price of ABC is $100. Trader
Jim sold short 100 shares at $100.
As the market price of ABC falls Trader
Jim has an unrealized gain in the
amount equal to the selling price
less the market price. When ABC reaches
the market price of $90, Trader Jim
buys back to cover. He then realizes
a $1000 profit. (100 X ($100-$90))
Bad and the Ugly:
Trader Jim sold short at $100 and
the market price then rose 15 points,
Jim would be facing a $1,500 loss.
Beware, the loss potential is only
limited to how high the price of the
security could climb, in theory this
loss is unlimited.
SEC & FINRA Rules
To prevent short sell transactions from causing a
precipitous fall in a securities market value, the
SEC and FINRA have established specific rules for shorting
securities. The first rule is the Uptick rule for
listed securities. The Uptick rule requires that short
sales of NYSE securities be effected only at a price
above the previous sale price (an uptick) or at a
zero plus-tick. A zero plus-tick occurs when a tick
is equal to the preceding tick, but is greater than
the most recent different tick.
a NNM or NASDAQ National Market security the parallel
rule is called the Bid Rule. To effect a legal short
sale on a down bid, the sale must be executed at a
price at least 1/16 of a point above the current inside
bid if the spread is 1/16 point or greater; or at
a price equal to or greater than the offer price if
the inside spread is less than 1/16 point. On the
level II, an up bid is denoted when the bid is highlighted
in green and a down bid is denoted in red. If the
inside bid is green the stock is shortable.
rationale for these rules is to prevent an uncontrolled
decline in the market price of the security based
upon short selling of the security, since the price
of a security is ultimately determined by the number
of sellers vs buyers. If there are more sellers the
market price will continue to decline and the traders
who shorted the stock will in effect be manipulating
the market for profit. The up-tick restriction requires
a buy to offset a short sell to prevent artificial
selling pressure in the security.
Additionally, a short sell is treated as an opening
position and is subject to Regulation T. Regulation
T or Reg-T is the margin rule that requires an initial
deposit equal to the value of 50% of the sell price
plus 100% of the proceeds. The maintenance requirement
is as follows: 100% of the proceeds of the sell plus
30% of the closing value of the security. The account
is marked to market at the end of each trading day.
It important to note Reg-T is only applied to the
initial purchase. If the Reg-T amount is not in your
account on the day the purchase was made it will cause
a Fed call.
Additionally, short sells can only be placed on securities
with a market above $5 per share and only in a margin
Jim sold short 100 shares of ABC @
$100. His initial margin requirement
is $15,000. $10,000 of this amount
will come from the proceeds of the
sale; however, the remaining $5,000
will come from cash, margin credit,
or will increase the debit balance.
maintenance margin rules apply to
short sells as follows: Initial purchase
proceeds plus 30% of the market value
of the stock.
initial maintenance requirement is
$13,000 of which $10,000 is satisfied
with the short sell credit. If the
value of ABC rises to $120 his requirement
increases to $13,600. His maintenance
requirement will be the proceeds ($10,000),
plus 30% of the market value of the
stock. If Trader Jim does not have
the additional $600 in maintenance
excess he will be in a maintenance
call. Should the value of ABC fall
to $50 his maintenance requirement
would be $11,500.
the end of each day the position will
be marked to market:
the market value of the security
fell a release to maintenance
excess will be posted to the account.
the security rose in value the
maintenance excess would diminish.
sells can be used to profit in a falling market. To facilitate
your trading Scottsdale Capital Advisors has an extensive list of over 4000
stocks which can be shorted daily. Additionally, we will
make available the previous days all time highs to be
shorted; furthermore, if there is a stock not represented
on the short list a trader support representative will
attempt to secure shares for your use. Such requests normally
take between 2 to 5 minutes to process and the stock is
Scottsdale Capital Advisors
can make available 5000 shares of any stock on the
list of over 4000 stocks available daily. These shares
are offered on a first come first served basis. Upon
request we will attempt to obtain additional shares;
however, this is on a best efforts basis.
you would like more information on the fundamentals
of short selling please call Trader Support at 1.800.327.1883.
Trades Executed through Scottsdale Capital Advisors (Member: FINRA, SIPC, NASDAQ
and NYSE Arca)
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