2 weeks ago my broker forced me to buy back some (under water)shorts that they were no longer able to borrow. Some short positions require more than a few days to work out. This has made me much more careful to get into shorts. Any advice? Txs.

  • Cody

    This is a common problem with shortselling, we gotta live with it. It's not possible to foresee or prevent this completely, and usually happens on stocks that will most likely fail soon. That's why I tend to take the risk because the potential reward is greater. If you think your shares may be called back and therefore avoid an early trade, chances are you'll be out of the trade the day stock plunges 30% because there will be no shares left to short.

    Still, if you want to reduce the risk of a buy-in, these are some tips:

    - If a stock isn't available to borrow in many places but it is at your broker, chances are it is scarce, increasing the chance of being called in. You should probably reduce the timeframe of your swing (daytrade even) or maybe not enter the trade.

    - Sketchy PK or OTC stocks are most likely to be called in. Even if you know for sure that a stock like this will eventually fail, you may want to stay away from it until it shows signs of weakness. Yes, it will usually mean you won't find shares when needed. So again, I think the reward outweighs the risk.

    - Some brokers are more likely to force buy-ins. You can do some research and ask shorters in other brokers to see how frequently they get this.

    - Looking at past patterns, you can try to time your entry a little better. If a stock is on its first day of a huge spike, even though you know it will come back below it eventually, it may be wiser to wait as most spikes keep going for 2-3 days. So, finding the balance between too-early-to-short and so-obvious-that-everyone-wants-a-short is the key. The key is being there before everyone else, but not so early that you are exposed to the stock for a long time with a big chance of forced underwater buy-in. Easier said than done, I know.

  • Cody