Tag: shorting

  • Metrics For Short Selling Stocks

    Metrics For Short Selling Stocks

    Metrics For Short Selling Stocks
    Different traders can adopt different metrics for short selling stocks but these few can point out the current market positioning and traders’ sentiment.

    Metrics for short selling stocks are used to uncover the potential short-sell candidates and to track the activity on stocks. There isn’t a formal method but, in short, different traders use different metrics for different purposes. The common thing for all of them is to recognize the best candidates for short-selling and to track them.

    Of course, each trader is unique in style, appearance, or goal and the same comes when deciding what metrics for short selling stocks they use.

    Some traders would add many variables to take into account everything that possible can influence a company’s earnings. For example, they will examine all factors that might cause the earning to go lower which would show a great opportunity for short-selling the company’s stock.

    However, other traders will look at a few important metrics for short selling stocks in several main variables but they will examine them in-depth.

    But both types of traders would like to gather as much as possible data, so it isn’t unusual that there is no clear separation on categories. So, metrics for short selling a stock can be divided into several different methods of measuring. We will present to you several metrics that we found to be important.

    SIR as one of the metrics for short selling a stock

    Short interest ratio or SIR, basically tells traders the number of shares available for short selling. If this SIR ratio is high that means that there is higher attention on that stock because short-sellers are expecting the stock price to fall very soon. That also means that traders believe that the stock is currently overvalued and they assume the stock will fall in price.

    For traders, this is a bearish indicator, meaning the market is pessimistic on that stock since it has a high short interest ratio. Should traders get into stock with a high short interest ratio? That depends. If high SIR is caused due to mispricing there are a lot of chances to go short with it. But SIR can be high due to the fact that the stock is simply bad. The ability to make a distinction why the SIR is high makes the difference between winning and losing trades. 

    As you know, short-sellers have to buy back their position if they want to profit and that might cause increasing interest and the stock could increase in price. This uptrend may occur very fast if too many short-sellers would like to cover fast in a short time frame. This situation is described as a short-squeeze. The consequence is that traders will not profit from this trade.

    Nevertheless, the SIR is one of the metrics for short selling stocks and can be calculated to get a quick tip if the stock is massively shorted or not, compared to its daily trading volume.

    SIR is easy to calculate, the total shares held short should be divided by the average daily trading volume of the particular stock. 

    SIR = Short Interest / Average Daily Trading Volume

    The short interest ratio

    You can find more than one definition for the short interest and several ways to calculate this ratio. The short interest ratio could mean the same as the days to cover or the short interest as a percentage of float.

    But the principle is the same: a stock with a high short interest ratio has a high number of shares sold short or, in other words, a low number possible to trade. 

    The short-interest ratio is simple to calculate. Take the number of currently short sold shares and divide that number by the average daily trading volume for the particular company. For example, if traders have shorted 6 million shares of that company and its average daily volume is 2 million shares then the days to cover is 3 days. Hence, if all of the short-sellers want to close their positions at the same time, it would take around three days for them to do so.

    The ‘days to cover’ expresses the total amount of time for all short sellers participating in the market with particular stock to buy back the shares that the broker borrowed them.

    Short Interest To Volume Ratio = Current Short Interest / Average Daily Share Volume

    “Days to cover” is a useful ratio for traders. 

    High value to this ratio is a bearish indicator. It might be a signal that everything is not great with company performance.

    It can be a sign of how bearish or bullish traders are about some company. Also, traders could get the idea of potential future buying pressure thanks to this ratio. The short-sellers don’t have too much time to buy back stocks and to get out of the position. Hence, this is one of the possibly most important metrics for short selling a stock. Naturally, they want to buy the shares back at the lowest price possible. Hence this need to get out of their positions could force prices to move higher. The longer the buybacks take, the longer the price rally will continue. A high “days to cover” ratio can be a signal of a short squeeze.

    Short interest ratio expressed in percentages of float

    The other way to calculate the short-interest ratio is by dividing the number of shares sold short by the total number of shares available for shorting. But expressed in percentages.

    For example, the company has 20.000 shares but 5000 shares are locked-in and cannot be sold because the company gave them to the management. So, the company has a so-called public float of 15.000. Let’s say that another 5.000 are sold short. So we have to calculate the short-interest ratio.

    (5.000/15.000) x 100 = 0,33 x 100 =  33

    This gives us a short interest ratio of approximately 0,33 or 33%.

    Short interest of float above 50% means that short-sellers wouldn’t have an easy covering of their positions if the price turns to rise.

    How to trade by using metrics for short selling stocks?

    The same as we use metrics to evaluate the stock, these metrics can be interpreted in several ways.

    For example, when we have many short-sellers on one stock, it may be because the company isn’t successful. There are numerous reasons why the company isn’t profitable. Sometimes it can be due to the market shifts and the company’s business model that became unprofitable. Also, maybe the officers of the company are connected to some gossip about possible nefarious actions.

    Or the other example, a high short interest ratio could be a signal that the stock is a bargain. When some company is developing a new product, reports in its early stage might indicate the product could be risky. What is possible to happen? Short-sellers will open their positions driving the short interest above, for example, 20%. But later, when the product appears as very useful and popular, short-sellers are forced to cover their positions because short interest is high. This could cause the stock price to rise, and there will be a strong rally. 

    This potential for unexpected rallies in stock with a high short interest ratio, causes many experienced traders to see this metric as a bullish indicator.

    Bottom line

    Different metrics can be used to classify short-sell candidates. But these metrics are worthless if you never compare SIR and current short interest with previous levels and recognize possible overexpanded levels of stock. Compare the current metrics for the same company’s performances over time. Metrics for short selling stocks are worthless if you don’t do that. Your plan to become a short-seller will probably fail, and you would end up empty-handed.

  • Morgan Stanley Taking Lyft For A Short Ride?

    Morgan Stanley Taking Lyft For A Short Ride?

    3 min read

    Morgan Stanley Taking Lyft For A Short Ride?
    Lyft, a popular ride-hailing app, has gone public on 29th of March this year, but since then their ride was a bit bumpy. And for that, they blame the Morgan Stanley, the underwriter of IPO for their direct competitor Uber

    When Lyft got listed on the market on March 28 stock was priced at $72 dollars. When next day it started trading it opened at $87.33, but quickly reached the high of $88.10 and closed at $78.29, 8.7 percent above its listed price. On Monday, April 1, it has closed at $69.01, just short of $3 dollars under the price the initial investors have paid it. Since then it has recovered and is moving above the listing price, but Lyft still has a long ride ahead.

    Reports said: Morgan Stanley is trying to short Lyft

    According to the report from the New York Post, based on the unnamed sources, Morgan Stanley is trying to short Lyft. Though the NY Post has a bit of a reputation, the Monday drop in stock price precedes some rather bizarre bets. Recently Lyft has sent an email to their pre-IPO investors reminding them are not allowed to commit to any transactions that might affect a holder’s economic interest in the stock. Allegedly, this and the language of the “lock-up” agreements have led investors to hedge their investments, and not trying to earn from the fall of the stock price. A “lock-up” agreement is a legally binding contract issued by the underwriters of an IPO that prohibits people close to the company, including executive and employees, from selling shares for a period of time, in the case of Lyft for 6 months.

    Morgan Stanley Taking Lyft For A Short Ride? 1
    Despite the fact that Lyft has yet to report any profits, IPO has attracted a lot of attention and actually getting oversubscribed on the second day of trading. According to the same NY Post report, Morgan Stanley has contacted one of the IPO’s underwriter in an attempt to seek help in shorting the stock. Allegedly, Morgan’s customers who have invested in the Lyft before IPO are attempting to protect their investment from price fall, contrary to the “lock-up” the agreement and the bank is offering them such product. And the report is citing an unnamed investor saying “If I can lock in $70 now, I’m going to do that”.

    Do you know what the Shorting stock does mean? Find HERE

    Lyft is demanding

    And Lyft has decided to respond to this situation. According to reporting of CNBC, they are threatening Morgan Stanley with a lawsuit over this situation. In a letter, which CNBC had reviewed, Lyft is demanding that the bank publicly state that they are not helping early investors in short-selling the stock. But also demand that if they are selling such product to hand over a list of shareholders who are involved. While Lyft has requested a response by the end of the day on April 2, Morgan Stanley is yet to officially reply to these allegations.

    However, in the statement to CNBC, a bank’s spokesperson have stated that Morgan Stanley “did not market or execute, directly or indirectly, a sale, short sale, hedge, swap or transfer of risk or value associated with Lyft stock for any Lyft shareholder identified by the company or otherwise known to us to be the subject of a Lyft lock-up agreement.”

    In the reported letter Lyft and the IPO syndicate are accusing Morgan Stanley of creating a special instrument which allows pre-IPO investors to circumvent the “lock-out” agreement and short-sell the stocks. “Our firm’s activity has been in the normal course of market-making, and any suggestion that Morgan Stanley has engaged in an effort to apply ‘short pressure’ to Lyft is false,” the spokesperson for Morgan Stanley said.

    The single largest transaction

    According to CNBC’s report quoting an unnamed person close to Morgan Stanley operations, short-selling accounts for 1.3% of Lyft’s trading volume, with single largest transaction accounting for 425,000 shares. Also, according to this report, the Financial Industry Regulatory Authority, the self-regulatory organization of the US banking industry may have been involved in this matter.

    Maybe the strangest thing in this dispute between Lyft and Morgan Stanley is the reports from market analysts, including the Citron Research one of the investors in Lyft, calling the shorting of the company an “amateur short”. Citron has published a report stating five reasons to not short Lyft, chiefly stating projection of the Goldman Sachs that ride-hailing industry will grow to $285 billion by 2030. With that in mind, Morgan Stanley has secured the underwriting deal for Uber’s IPO, the direct and much larger competitor of Lyft. And according to CNBC’s reporting Lyft has addressed the above-mentioned letter also to the bankers who are managing the Uber’s IPO, which is interesting as the short-selling products are created in a different division of the bank, separate from investment banking.

    Don’t waste your money.
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  • Long and Short Trade

    Long and Short Trade

    3 min read

    TRADING OPTIONS - Understand the World of Options
    Long and Short refer to whether a trade was initiated by buying first or selling first.

    To be more specific.

    A long trade is opened by buying with the expectation to sell at a higher price in the future and earn a profit.

    But, a short trade is opened by selling, before buying, with the intent to buy back the stock at a lower price and gain a profit.

    In the trading of assets, an investor can take two types of positions: long and short.

    And such investor can either buy an asset (going long) or sell it (going short).

    Long and short positions are further complicated by the two types of options, the call and put. So, the investor may enter into a long put, a long call, a short put, or a short call.

    Furthermore, the investor can mix long and short positions into complex trading and hedging strategies.

    The simplest way to classify “long” and “short” trades is to state that in any trade, you are long of that from which you will profit if it rises in relative value. Hence, you are short of that from which you will profit if it falls in relative value.

    Here is the example, assume that you buy a stock of XYZ company with Euro. So, you are “long” stock of XYZ and “short” of Euro. This is because for you to profit, the value of the XYZ company stock must rise against the Euro, or alternatively, the value of the Euro must fall against the stock of XYZ company.

    You should know that in a trade where you are short of a currency against some tangible asset, you would usually refer to that only as a “long” trade.

    So, not saying that you were “short” of the cash denomination.

    What is the Short trade

    If you believe that a market is going to go down, you can make money by short trading or short selling that market.
    Long and Short Trade
    Short selling (also known as going short or shorting) means that you’re selling the market first and then striving to buy it later at a lower price.

    How can you sell a stock before you buy it?

    It’s truly not as hard as it looks.

    To sell a stock that you don’t own, for instance, you need to borrow it. Your broker may let you borrow a stock owned by another trader or, less commonly, owned by the broker himself.

    When you’re able to exit your short position, you cover the position by buying back the stock you had shorted.

    In other words, selling before you buy really means you’re borrowing the stock before you short sell it.

    That’s all the wisdom.

    Hence, going short can be very distinct from going long.

    One thing is very important. Stocks and commodities, but particularly stocks, may have a “long bias”.

    Why this is so important?

    Because this nature means that their value is more likely to rise over time than fall.

    Falls in stock markets, or “bear markets”, tend to be faster and more violent than rising markets, also called “bull markets”.

    “Shorting” is frustrating to most new traders because in the physical world we have to buy something and later sell it.

    In the financial markets, we can buy and then sell or sell then buy.

    Why short trading is so exciting

    Selling first and then buying later has many advantages.

    The fear is a stronger emotion than greed. Hence, markets tend to go down faster than they go up.

    Trading With Success - a guide for beginners 40short trading is so exciting

    When traders feel fear, they want to exit their long positions immediately. The truth is that markets can go into a free fall. Therefore it’s typically possible to make money faster by short selling than by buying.
    If you short trade, you basically increase your ability to make money in different market conditions, even uncertain. When you are going short, you give yourself more chances to make money.

    Moreover, shorting options can provide a hedge against your long positions.

    About options READ HERE>>>

    Options are less expensive than buying the stock itself and, therefore, can act as a type of insurance policy against a stock position.

    Taking a short position on a stock with an option would actually involve buying a put option. That can seem a bit confusing. You have short exposure to the stock as the value of the put option rises as the stock price goes lower.

    Point is, and also the benefit, that you pay a small premium, which can be viewed like a deposit that allows you to sell the stock at a higher price if the stock moves down.

    Short selling also has several disadvantages

    First of all, going short is more expensive than going long. When you short a stock, you’re borrowing the stock and have to pay a fee for doing so.

    In theory, short selling has an endless risk.

    If the market goes against you (meaning going up), there’s no limit how high the price can go.

    Not all stocks are available for going short, and some of those that are accessible aren’t always possible. This reduces the space of stocks suitable for you to trade.

    Further, short trade must be done in a margin account. Are you comfortable trading with borrowed money? It’s up to you to decide.

    Remember, when you short a stock, you don’t own it. You’re borrowing it from your broker who still owns it.

    So, the broker will want the dividend if you’re holding the short position when the company issues dividends.

    What is a long trade

    When the investors are in a long trade, they bought an asset with the hope the price will go up.

    In a long (or buy) position, the investor is hoping for the price to rise. An investor in a long position will profit from a rise in price.

    The typical stock purchase is a long stock asset purchase.
    Long and Short Trade 2
    A long call position is one where an investor purchases a call option. Thus, a long call also benefits from a rise in the underlying assets price.

    A long put position involves the purchase of a put option.

    The logic behind the “long” aspect of the put follows the same logic of the long call. A put option rises in value when the underlying asset drops in value. A long put rises in value with a drop in the underlying asset.

    The traders often will use the terms “buy” or “long”. Hence, the trading software may have an entry button marked “buy,” while other trade entry buttons marked “long.” The term often is used to describe an open position, which indicates the trader currently owns shares of some company.

    Traders usually say they are “going long” or “go long” to show their interest in buying a specific asset.

    When they go long, their profit potential is unlimited. The price of the asset can rise endlessly. For example, if you buy 100 shares of stock at $2, that stock could go to $4, $8, $50, $100, etc.

    The traders use to trade for smaller moves.

    The risk is limited to the stock going to zero. In the example above, the largest loss possible is if the share price goes to $0, resulting in a $2 loss per share.

    Trading the long means that you have used a buy order as your opening trade or ‘gone long’. This means that you are anticipating a rise in price and will use a sell order to close your position.

    Long and Short Forex Trades

    In Forex, things are different, because whether you are making “long” or “short” trades, you are always long of one currency and short of another. If you buy or go long, EUR/USD for example, you are buying EUR with USD. You are long EUR and short USD. If you sell or go short, EUR/USD, then you are long USD and short EUR. It is really all the same.

    The only significant factor regarding the long and short trades question in Forex is any interest you might need to pay to your Forex broker if you hold a position overnight, or alternatively receive from your broker. This is calculated by reference to the interest rates at which banks lend particular currencies to each other, at least in theory. Unfortunately, Forex brokers sometimes use this as a subtle way to make some extra money from their clients.

    Forex Trading Program - How To Choose The Most Useful 5Long and Short Trade

    For example, let’s say you go long EUR/USD. You have, at least theoretically, bought EUR with USD. If the interbank interest rate for USD is higher than it is for EUR, your broker might be paying you some money each time you hold the position over the New York rollover time (i.e. daily). This is because you are getting interested in your USD greater than the interest they are getting on the EUR, and in theory, positions are “squared” at every New York rollover. On the other hand, if the interest rate on the currency you are long of is less than the rate for the currency you are short of, you will be charged some amount representing the difference every day that the position is kept open.

    All about unknown terms you can read HERE

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