Yahoo Finance

For Immediate Release

Chicago, IL- December 07, 2015 – Today, Zacks Investment Ideas feature highlights Features: Lumber Liquidators (LL), Portola Pharma (PTLA) and Macy’s ( M).

A Safer Way to Short Stocks

Most investors don’t like to short stocks because shorting carries unlimited risk. This recently played out in a very bad way after a person shorted KaloBios Pharma only to see the stock move from $2 to $18 in after-hours as another investor bought a high percentage of the float.

This doesn’t happen all the time, but it is not advisable to short low float stocks with a large percentage of your portfolio. The question becomes what is a good opportunity to short a stock?

Before You Short

If you are looking at a long term prospect, be sure you understand what the costs involved in the borrow are. Brokerages will charge a rate of interest based on the demand for shorting shares, we call that the borrow. The more people want to short a stock, the higher the borrow rate will be. This will eat into the total return of your investment, so makes sure you aware of the rate.

It might also be wise to look into buying a put instead of shorting the stock. The put will give the exposure you are looking for, but it will eliminate the unlimited risk. The put can only go down 100%, so you won’t have to pay $18 for a put that cost you $2… but you might be able to sell it for $18.

Shorting stocks or looking for downside is every bit as difficult as finding a stock that looks to be going up. In fact, there is a saying on Wall Street that stresses that it might even be more difficult than being long. They say “shorts do the most homework” which implies that they are deeper into the story behind the stocks than the longs. This is mostly true, and a great example of this is Whitney Tilson’s short of Lumber Liquidators ( LL). He tested products for poisonous fumes, and I highly doubt those long the stock did the same thing.

The Secondary

One strategy for shorting stocks in a small time horizon, is playing the secondary offering. A company will hold a secondary offering to raise some capital or allow large investors to exit their positions. In most secondary’s, the company will announce the offering, then through investment banks they will gauge interest from the market. The bulk sale of stock is almost always done at a discount to the market price.

That discount is what gives shorts a good opportunity to make some quick gains. The longer term short thesis also benefits from the secondary offering when the company sells shares to raise capital for itself. This increases dilution and lowers earnings per share.