Posts Tagged ‘Short Selling’

From The Big Picture:



Meanwhile the S&P 500 declined 30% from 1,200 to 850 in the same time frame – I realize this isn’t a metric of correlation (especially in lieu of the massive liquidations over this same time) but it’s peculiar that there are fewer short sales.

Here’s what I think is really going on…

From Bloomberg:

VIX Jumps

The benchmark index for U.S. stock options jumped to the highest since Jan. 23 as investors paid more to use options as insurance against stock-market declines. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 8.8 percent to 47.49. The index averaged 32.65 last year.

Could it be that people are using options instead of formal short sales? When volatility is this high, it is easier and safer (to a degree) to buy a put option to hedge against losses…or set up a synthetic short sale if your risk appetite is higher. Another benefit of buying put options, is we are not victim to the schema of “stocks can only go down to zero, but can go up to infinity,” since we only lose the price paid for the option (should it expire or fall deeply out of the money).

Secondly, when the VIX is at 47, there are rapid swings in short periods, allowing the investor a better chance of executing a profit – If I bought a put on the Dow with a strike price of 8,300 with 20 days until expiration, and the index suddenly jumps to 8,500, there’s no real cause for worry. There is still a very good chance the option falls in the money in 20 days.

In summation, I don’t think people have stopped shorting in an environment like this – they’re just using different tools to do it.


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By now we’ve heard the concession: “How can people complain about market manipulation, when our government engages in manipulation themselves?”

There has been an angry outcry about the temporary ban on short selling of 799 financial institutions because of the potential implications:

  • Besides the obvious parallels between socialism and a nationalized financial system, our markets are now artificially inflated (the gains we are witnessing would not be this dramatic if there were short selling). Unfortunately, we will be subject to more volatility once the ban expires on October 3rd. Gages such as the “VIX”, or volatility index, which traders often use to judge whether a market is overbought/oversold, will be obsolete for an indefinite time frame.
  • The thing which I am most worried about, is that since the SEC has disclosed the exact date in which short selling will be reinstated, There could a widespread collusion opportunity amongst bearish Hedge funds (That day is definitely marked down on their calendar). The SEC has effectively advertised the very time we will not be watching the gate, and potentially created a platform for more severe market manipulation. There will be a gigantic buildup of vultures waiting to make their move…a flood of shorts could overwhelm the market due to this ban.

Once the short squeeze is over, there will be no more shorts to squeeze, and the market may realize that the “legs” of this rally were unfounded.

Finally, short sellers were not the root of destroying the financials; If there had been a glimmer of transparancy, Wall Street would not be in running for its life. One thing is for sure; this bailout will force a realization of the severity of our problems, and we will find out if the market has yet priced in the truth.

Here’s a link to two of Doug Kass’s articles…he is the ultimate short seller:

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