Thursday, June 29, 2017

Equity Management #18 : Mysteries of short selling stocks.

Ok, now that I have established a system for margin trading, it is time to move on and consider this other system which I have always been curious about which is short selling.

In the US, short selling is quite interesting as a sale should ideally result in some cash in your hands. You can then deploy this cash into various other long positions.

I've always been curious as to how short selling works but I have no idea how to start. I am somewhat familiar with Contra trading where you sell a stock and then try to buy it back within the next three days but this is more akin to speculation and I can't take up a long-term short position against a stock that is being mis-managed or over-hyped. ( I don't wish to engage in CFDs for now because it's more like getting into a derivatives position. )

The Equity Management textbook mentioned that short positions are very different compared to long positions and are subject to many interesting constraints, some of these constraints are regulatory and others are self-inflicted :

a) You are obviously constrained by a budget which you have set for yourself.

b) Another constraint that is interesting is called Regulation T which applies to equity, convertible bonds and equity mutual funds. Suppose you have $10,000 in your cash account. The sum of long positions and absolute value of short positions cannot exceed $20,000. So if you short $5,000, you can at most create a $15,000 long position. Seems logical but this only applies in the US.

c) Some investor specify a fixed gap between the value of the long positions and the short positions. A 120-20 position has a gap of 100%. A market neutral portfolio has a gap of 0.

d) Some securities are simply hard to borrow and the broker will not even allow you to short those counters.

I would really appreciate it if a reader would point me towards some kind of short selling facility for local stocks.

As of now, the closest thing is my margin account which is basically shorting a 2.88% bond to buy REITs and Business trusts.


  1. Chris,

    Are you trolling us? You worked in SGX before you know? Back end not interested in what the front end is doing? Tsk, tsk.

    Anyway, I'll bite to move things along ;)

    1) If its SGX stocks, the most expensive way is the Securities Borrowing and Lending (SBL).

    You "borrow" the stocks from your broker to short.

    Its a lot cheaper if we have access to Prime Brokers - but you need to be a Big F in account size. I'm puny :(

    2) If you remember your contra days, then you can also short stocks INTRADAY with normal stocks or margin accounts. BUT you must cover your position by the end of trading day. If not, SGX will cover your short positions for you at anyhow "hantam' prices T+3 just to spite you ;)

    3) The easiest and cheapest way to short stocks in SGX is via CFDs. But since you don't want, that's that! You funny. CFD's leverage is 5 to 1 for stocks, while margin account is 3 to 1. Its like saying you smoke but you don't inhale... LOL!

    4) Oh! This I must troll SGX. Remember single stock futures? Epic fail... But good try nevertheless. If don't try how to know?

    5) Most people not aware we can short SGX stocks via Warrants. But its only for a very limited select stocks :( Make sure you buy the correct Call or Put Warrants!

    6) My favourite is to use SGX futures like Simsci to short/hedge our long equity positions. Not a direct hedge, but close enough. Cheap and simple too. 1,2,3, I know. Its a derivative! LOL! Warren Buffett made quite a lot of money from derivaties you know?

    I don't listen to what people say; I listen to what they do ;)

    Eh... I thirsty. So you buying me coffee or not?

  2. Your argument is like saying that just because I work in Geylang, I must understand all the different sexual positions known to Mankind ! LOL !

    Anyway, you deserve more than a coffee for your comprehensive rundown of techniques to profit from falling stock prices. Sadly, there is no approach that gives a short seller cash because he is indeed selling something for an agreed price !