4 ms·

Since these guys are professional investors I assume they have access to more complex financial instruments they can use for a short position. Maybe the compan

Since these guys are professional investors I assume they have access to more complex financial instruments they can use for a short position. Maybe the company being vaporized is always a risk of shorting though, not a finance guy so I have no idea.

chii 4y ago
> the company being vaporized is always a risk of shorting why is that a risk tho? If you shorted something, the money is already in your hands (aka, you "sell" short presumably, where you make a buck selling it now, and have to put up cash in the future to make the short whole). If in the future, the company vaporized, then wouldn't you no longer owe the shorted stock?
- stale2002 4y ago
  The issue is one of margin calling, and other institutions being unwilling to lend you infinite amounts of money. Even if your investment strategy is sound, if in the short term, you on paper owe stock that is "worth" billions of dollars, the institutions that you are owning this paper billions of dollars too, could be unwilling to just trust that you will be able to pay it. Thus, they bake in contractual provisions, such as margin calls, which require you to automatically sell/buy the stock back, if you ever reach certain loss limits. Thus, forcing you to accept the loss now, even if your long term strategy is hypothetically profitable. Or, at least that is the simplest/most common ways that this work. I am sure that margin calls are more complicated than that, for large financial institutions.
  - thefreeman 4y ago
    But if the stock goes to zero and you are shorting it the trade was massively profitable. why would you then be at risk of a margin call?
    - lmm 4y ago
      If trading is halted or it's delisted, how can you prove the value of the stock is zero?
      - drexlspivey 4y ago
        You don’t have to “prove” anything, you already got the money
        lmm 4y ago
        You're still stuck paying borrow fees and posting collateral, potentially forever.
        thefreeman 4y ago
        This is just wrong. If the stock is delisted you no longer are "borrowing" anything. There is nothing to borrow.
        lmm 4y ago
        An unlisted stock is still a stock, you still have to have a borrow for it until the company is fully wound up (which could be years after being delisted).
- derf_ 4y ago
  No, you still owe the stock, but if trading is halted or the stock's registration is revoked, you cannot close the position. That means that (a) you still owe (daily!) stock borrow fees, and (b) you are still required to keep collateral posted against the shares with your broker (because the stock is not trading, the last posted price can be considerably above zero, so this can tie up a non-trivial amount of money). In recent memory, this has happened to Longfin Corp. [0], Cynk Technologies [1], China Biotics [2], and surely others. If it does happen before you can close out a short position, that's bad. You can be stuck that way for years [3]. [0] https://www.sec.gov/enforce/information-longfin-investors https://www.sec.gov/enforce/information-longfin-investors [1] https://www.sec.gov/litigation/suspensions/2014/34-72594.pdf https://www.sec.gov/litigation/suspensions/2014/34-72594.pdf [2] https://www.sec.gov/litigation/opinions/2013/34-70800.pdf https://www.sec.gov/litigation/opinions/2013/34-70800.pdf [3] https://www.barrons.com/articles/getting-caught-short-1523065469 https://www.barrons.com/articles/getting-caught-short-152306...

chii 4y ago

> the company being vaporized is always a risk of shorting why is that a risk tho? If you shorted something, the money is already in your hands (aka, you "sell" short presumably, where you make a buck selling it now, and have to put up cash in the future to make the short whole). If in the future, the company vaporized, then wouldn't you no longer owe the shorted stock?

stale2002 4y ago
The issue is one of margin calling, and other institutions being unwilling to lend you infinite amounts of money. Even if your investment strategy is sound, if in the short term, you on paper owe stock that is "worth" billions of dollars, the institutions that you are owning this paper billions of dollars too, could be unwilling to just trust that you will be able to pay it. Thus, they bake in contractual provisions, such as margin calls, which require you to automatically sell/buy the stock back, if you ever reach certain loss limits. Thus, forcing you to accept the loss now, even if your long term strategy is hypothetically profitable. Or, at least that is the simplest/most common ways that this work. I am sure that margin calls are more complicated than that, for large financial institutions.
- thefreeman 4y ago
  But if the stock goes to zero and you are shorting it the trade was massively profitable. why would you then be at risk of a margin call?
  - lmm 4y ago
    If trading is halted or it's delisted, how can you prove the value of the stock is zero?
    - drexlspivey 4y ago
      You don’t have to “prove” anything, you already got the money
      - lmm 4y ago
        You're still stuck paying borrow fees and posting collateral, potentially forever.
        thefreeman 4y ago
        This is just wrong. If the stock is delisted you no longer are "borrowing" anything. There is nothing to borrow.
        lmm 4y ago
        An unlisted stock is still a stock, you still have to have a borrow for it until the company is fully wound up (which could be years after being delisted).
derf_ 4y ago
No, you still owe the stock, but if trading is halted or the stock's registration is revoked, you cannot close the position. That means that (a) you still owe (daily!) stock borrow fees, and (b) you are still required to keep collateral posted against the shares with your broker (because the stock is not trading, the last posted price can be considerably above zero, so this can tie up a non-trivial amount of money). In recent memory, this has happened to Longfin Corp. [0], Cynk Technologies [1], China Biotics [2], and surely others. If it does happen before you can close out a short position, that's bad. You can be stuck that way for years [3]. [0] https://www.sec.gov/enforce/information-longfin-investors https://www.sec.gov/enforce/information-longfin-investors [1] https://www.sec.gov/litigation/suspensions/2014/34-72594.pdf https://www.sec.gov/litigation/suspensions/2014/34-72594.pdf [2] https://www.sec.gov/litigation/opinions/2013/34-70800.pdf https://www.sec.gov/litigation/opinions/2013/34-70800.pdf [3] https://www.barrons.com/articles/getting-caught-short-1523065469 https://www.barrons.com/articles/getting-caught-short-152306...