Short Selling? Is it Worth It Anymore?
The era of Meme stocks are making it harder
Is Short Selling Worth It?
So you thought 2020 was over? Nope. The WSB and Robinhood crowd is still out there....lurking, waiting, researching MACD strategies and waiting for their next pump.
Back in 2020-2021 it was AMC, GameStop and Hertz, which was effectively bankrupt.
I remember watching all of that and thinking this is insane: people bought Hertz, a bankrupt company and spiked it.
It's actually fascinating to watch people go after them.
But this has dramatically changed the market structure on short-selling at large. How to start short trades, what you can short and when to cover them have all changed, at least in my view, and I'll explain why here in this post.
Now if you're new to this site let me update you on my past a bit to provide you with context.
I am not a 'short-seller' - rather, I just take an opportunistic approach to investing.
In 2011/2012 the firm I was with was massively short for-profit college for a long-time. There were fundamental flaws with their business model that the price chart did not tell you.
That was a big short based on nefarious activities in their enrollment schemes.
Then again, last year, in early 2022 I was one of (a few) folks to actively discuss why Carvana was a $0.
So there is a bit of a background. I have some experience in shorting bigger fundamental themes but this new era, well, it's dangerous.
And, it might be, an inefficient use of time.
If you search the $BBBY or $CVNA hash-tags on Twitter you'll find stuff like this above.
Honestly, it's embarrassing because 99% of it is analysis like that.
It's people talking out of their ass not understanding anything but so confident in what they believe is correct.
To start the year Bed Bath and Beyond announced that they would likely be filing for bankruptcy. And in true new-era, low-IQ fashion, the stock was squeezed.
Now look, there is the side that says "well it makes money by squeezing" sure, it does, until it doesn't.
This game is the equivalent of playing Russian Roulette: you might win a few times but eventually you're going to blow your brains out.
So how does this change the dynamic of short-selling?
For one, you have to be massively ahead of the crowd on these ideas. Before the implied vols spike on the options chain, before short interest increases etc.
When I was shorting Carvana early last year the short-interest was sub 20%.
At last glance, I believe it is north of +80% today.
The options IV's have also spiked dramatically, some are north of +500%.
But, that doesn't stop the meme crowd from buying them.
Second, it affects how and when you exit on the positions and I can tell you this from legitimate experience on Carvana last year.
I had to exit a lot of the trade near low $30s (from $140s-$155s, select derivatives included).
Mainly because of what you are seeing: short squeezes.
The short interest started to increase but even at $30 a share it bothered me.
Now, usually, from what I have noticed from this crowd of traders is that it has to be below $10 a share to squeeze.
Because, and this is real, in their mind $10 is 'cheap' if it's below $5, even better.
And this is the same crowd that, on the way down, were calling for short-squeezes and using MACD and trend lines to attempt to explain why "the stock was $300 a year ago bro, it can't be this low".
Really, this is the era we live in and I am not sure whether to be upset or happy about it.
It's funny actually, because I made a video on IV and options over the weekend discussing Carvana.
That video has 88 views. Imagine that. 88.
So it has dramatically changed not only what you can short, but how, and when to exit the ideas as well.
Which begs the question. Is short-selling even worth it anymore to generate alpha?
Short-Selling, Is it Worth It?
If you were to ask some of the top 10 hedge funds last year who were up north of +100% the answer is a resounding yes.
But at large, is it worth it?
Within individual equities, I am going to say no.
Through futures and select derivatives, yes.
But individual equities anymore it tends to be really tough.
Now let me say this, I know there is a sector of day traders that short pumps, pure scam style pumps, but that's not the realm I play in at all.
What my model/methods are, you can read here.
I am open to shorting genuine frauds or companies, like Carvana, who had a lot of things wrong with their balance sheet.
Because in those rare cases they are genuinely worthless.
But the problem anymore is they (individual stocks) are subject to meme stock squeezes.
In fact, I explained this to Forbes when I spoke to them about Carvana.
And here we are today, the stock rallying over +80% on lows.
Now at the end of the day is it about making money, sure?
But I will say this and any professional, trained investor or money manager that is worth their weight will tell you: Your Investing Framework is paramount.
How you put capital to work, where you put it to work, all of that, it matters.
It's not just about saying, "Ya, I made money on that" - any Joe Schmo with a RobinHood account and Twitter can make a trade.
But selecting what investments your capital goes to to get a return matters.
Let me make the final point here on this.
A Go Fund Me Account for Blowing up On A Short.
Back in 2015 this guy in Arizona started a Go-Fund me because he blew up his trading account shorting a $2 stock, which is first mistake.
Out of all the investments, to short a $2 stock with the potential (his analysis, not mine) to make $1 is just dumb.
Stop, for one second, think. If I short this for $1 or 50 cents, where else can I get a better RoR on my capital?
Let me name some other places, even today, where capital allocation is better spent:
ES Futures Options
Anything, really. But this mistake that this trader made then in 2015, it happens today still.
How and where capital is allocated matters.
Your Money are Soldiers.
I like to think of my cash as soldiers. If I send them off to war it better be one that they can win with ease. If that capital is going to work it better be into an idea where there is some tailwind, inflection and ideally, asymmetry involved.
Back in 2013, I started teaching a small group of DIY traders futures, some struggled a lot with the vol of the products, the fix? Easy. Switch to SPX/ES or SPY options.
Don't send your soldiers off into situations where the upside is limited and where the war is drawn out (dead money).
Short-selling in equities has it's limits anymore. There are the rare cases like Carvana and others last year, where there are opportunities.
I just like the idea of having the asymmetry to express short-views through futures and other derivatives anymore while still working within my own investment framework.
So if that means expressing ideas through Index ETF options, select commodity names or others, then so be it. That seems to be a more efficient and safer way to do it instead of using individual equities anymore.
Because at the end of the day, while there is some gratification in saying "The Emperor has No Clothes" (shorting frauds) the time, capital risk and other things you deal with in doing it are just not worth it, or, an efficient use of capital.
This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.
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