I’ve never shorted a stock before, only bought puts, so I’m just looking for some advice from someone who’s actually shorted a stock before.
Are the costs high to hold a position over a period of say 3-6 months? I believe the cost as a % of the total position isn’t that high, but since these trades are generally made on margin I’m just wondering if it actually gets pricy. The reason for my interest is Marvell Technology, who reported earnings last night, beat on earnings slightly, missed on revenue and issued weak guidance. I’m long the stock and expected the stock to be down slightly today. Instead its ripping higher by 7% at the moment and I’m just wondering if this is short covering? Short interest rose before the earnings and I’m wondering if people are just covering their positions because it’ll be too pricy to hold their short position until the next earnings report?
Pricing for the short, also known as borrow cost, rebate, rate, and a variety of other terms depends on the stock. GPRO earlier this year had over 100% rebate for a while. The rebate is annual, so if you are paying a 100% rate and the rate stays constant for 365 days, you would be out your entire investment. It is possible to have rates over 100%. The rebate is a function of supply and demand within the securities lending market which is a network of custodians, brokers and investment banks – that part of the business is pretty complex and probably warrants its own thread but suffice to say the more people looking to borrow a given stock relative to the amount of shares available for borrow determines the rate. The rebate can potentially swing wildly over both short and long durations based on these dynamics.
Most stocks trade at “gc” (general collateral) also known as “top” rate which means it has a rebate of 25 bps or whatever your gc rate is at your prime broker (<1% annually). Anything above gc or top is known as a “hard to borrow” security (HTB) and has a rate subject to supply and demand. Almost every big liquid stock is gc and around 50% of small cap stocks are gc (maybe higher depending on how you define small cap).
“Short covering” as an investment strategy is generally the battle cry of weak and frightened longs. Of course short squeezes can and do happen (holy TSLA pwnage, Batman!), but it’s generally the last vestage of the weak, typically people who have chosen to invest in stock frauds. You can tell I think there are lots of shitty investors who should probably just stfu and stop whining about short sellers, though this is not directed at you or your question, just an observation. If you think prices are manipulated by shorts, you are: 1) Wrong, and 2) the amount of long manipulation is 100x whatever occurs on the short side. There is a ton of regulation around the mechanics of shorting, including the misguided Reg SHO that went in circa 2005 I think, not to mention the uptick rule.
I have no view on Marvell and am not criticising your investment. Short squeezes are likely to occur in two places: 1) very illiquid names, 2) illiquid names that get picked up by algos and suddenly become ultra liquid, for example stocks that trade >100% of shares outstanding per day for several days in a row – the reason for the squeeze in this case is the algo is just scalping retail day trading idiots who are buying the stock, but are doing it in volume which dramatically drives demand up. This is a good way to get carried out in a body bag if you are short.
In terms of short positions occurring on margin, it depends on the strategy and the person or group shorting it. Generally the shorts are funded by the long book as in a long/short strategy. In a sense this is “margin” but it is more like collateral than the type of margin people typically think about (and this is why the rate is gc for most stocks, or the minimum rate a prime broker charges for any collateralized transaction). This is not the same as having a long only book and levering it up 3x or something based on borrowed money – the longs are fully paid for with equity and you are borrowing against what you already own. This is slightly oversimplified as you can have both long leverage (i.e., possible to run 200% gross long) and short margin at the same time, and both are borrowing against fully paid positions, but the mechanics are different.
Most people are very bad at short selling and should avoid it. The vast majority of retail brokerage accounts do not provide any meaningful setup for short selling anyway, which is likely for the best.