Banter and general comments, page-27177

Another article on shorting. It can be a dirty game.

Who’s naked when the tide goes out

So ‘naked’ shorting is when you sell but don’t have the stock to deliver. ‘Covered’ shorting is where you have borrowed the shares and therefore can deliver them to the market.

Shorting ‘naked’ therefore creates more shares in the market than actually exist.

If you short 100,000 shares into the market but don’t have them to deliver, then a company with 10m shares on issue now has 10.1m shares floating around, thanks to you.

If you have borrowed the 100,000 shares and then shorted them into the market, then there will still be 10m floating around.

I used to ‘naked short’ when it was legal but always had it covered off. This we happily did until I got tapped on the shoulder and told to stop.

Here’s how it work – I would buy short dated company issued options and exercise them to cover our stock shorting and both trades were done at the same time.

Buy 100,000 options, sell 100,000 shares naked and then exercise the options, which usually took about two weeks before the certificate arrived.

In the good old days, a company would IPO at, say, 20c a share and offer a free listed five-year 20c option as a sweetener for the deal.

Rule of thumb was, for every one year that the option had to go it was valued at 1c per year.

At 20c per share, that option would trade at 5c, so your total package would be worth 25c and I would sell the shares, get my outlay back and hold the options.

Fast forward four years and nine months and the company was at say, $1.00 a share.

I would sell 100,000 shares ‘naked’, exercise the options at 20c and deliver them two weeks later and pocket the difference.

There were fines to pay when you were not able to deliver your shares and transfer papers in a timely manner… but they were not much.