Short Selling Quotes

“In his job as a financial educator, Keith had spent a fair amount of time breaking down the act — and sometimes art — of short selling, in a way that less savvy customers could understand. When a trader believed a company was in trouble, and its stock was overvalued, they could 'borrow' shares, sell them, and then when the stock went down as they'd predicted, rebuy the shares at a lower price, return them to whoever they'd borrowed them from, and pocket the difference. If GameStop was trading at 5, you could borrow 100 shares, sell them for $500; when the stock hit 1, you bought back the 100 shares for $100, returned them, pocketing $400 for yourself. You paid a little fee to the lender for their trouble and came out with a tidy profit.

But what happened if the stock went up instead of down? What happened if GameStop figured out how to capitalize on its millions of nostalgic customers, who spent billions on video games every year? What if the stock went to 10 instead of 1?

What happened was, the short seller was royally screwed. He'd borrowed those 100 shares and sold them at 5. Now the stock was at 10, but he still needed to return his 100 shares. Buying them on the market at 10 meant spending $1000. And what was worse, when he'd borrowed the shares, he'd agreed on a timeline to return them. There was a ticking clock hanging over his head, so he had a choice — buy the shares back at 10 now, losing $500 on the deal — or wait a little longer, hoping the stock went back down before his time limit was up.

And what if he waited, and the stock kept going up? Sooner or later, he had to buy those shares back. Even if the stock went to 15, 20 — he was on the hook for those 100 shares. Theoretically, there was no limit to how much he could lose.”
― Ben Mezrich, The Antisocial Network: The GameStop Short Squeeze and the Ragtag Group of Amateur Traders That Brought Wall Street to Its Knees

“Which meant, if somehow GameStop did start to go up, the people who had shorted the company would begin to feel pressure to buy; the more the stock went up, the heavier that pressure became. As the shorts began to cover, buying shares to return them to their lenders, the stock would rise even higher.

In financial parlance, this was something called a 'short squeeze.' It didn't happen often, but when it did, it could be spectacular. Most famously, in 2008, a surprise takeover attempt of the German automaker Volkswagen by rival Porsche drove Volkswagen's stock price up by a factor of 5 — briefly making it the most valuable company in the world — in two quick days of trading, as short selling funds struggled to cover their positions. Similarly, a battle between two hedge fund titans — Bill Ackman, of Pershing Square Capital Management, and Carl Icahn — led to a squeeze involving supplement maker — and alleged pyramid marketer — Herbalife, which cost Ackman a reported $1 billion. And perhaps the first widely reported short squeeze dated back a century, to 1923, when grocery magnate Clarence Saunders successfully decimated short sellers who had targeted his nascent chain of Piggly Wiggly grocery stores.”
― Ben Mezrich, The Antisocial Network: The GameStop Short Squeeze and the Ragtag Group of Amateur Traders That Brought Wall Street to Its Knees

“Because so many people were betting against GameStop —and brick-and-mortar retail in general — the overall short position was enormous, almost comically so. At certain points over the past six months, it had bounced between 50 and even 100 percent of the overall float, meaning nearly all the shares of GameStop in existence had been borrowed and sold by short sellers, all of whom had an obligation to rebuy those shares at some point in the future.

So, what if Keith was right, and the stock went up instead of down? It would be like watching investors trying to get out of a burning building, through a single, narrow door. The stock would rocket.

As a financial educator, Keith knew that short selling could be one of the riskiest plays on the market. You really needed to be certain a stock was going down, because your upside was limited, but your losses could, theoretically, be infinite. The fact that so many competent investors were short selling GameStop could mean the stock really was a dog; but it also meant the stock was loaded with rocket fuel, and it wouldn't take much to ignite and sent it right to the moon.”
― Ben Mezrich, The Antisocial Network: The GameStop Short Squeeze and the Ragtag Group of Amateur Traders That Brought Wall Street to Its Knees

“And as a long-short fund, he'd also been obligated to take short positions — betting against companies — which was a tactic that, to most experts in finance, was uncontroversial. The thinking went, when companies were performing poorly, or were mismanaged, or were in an industry that was being overrun, or were simply likely to fail, taking a short position wasn't just logical — it protected the marketplace by pointing out overpriced stocks, prevented fraud by acting as a check against dubious management, and poked holes in potential bubbles. Short sellers also added liquidity and volume to a stock — because they were obligated to buy the stock back at some point in the future. Yes, short sellers profited when companies failed, but usually a short seller wasn't banking on a company failing — just that the stock's price would eventually correct toward its true valuation.

Sometimes, though, a trader picked up a short position because the company in question really was going to fail. Because, perhaps, it was in an industry that was dying; had management that seemed completely unable or unwilling to pivot; and had deep fundamental issues in its financing that seemed impossible to overcome.”
― Ben Mezrich, The Antisocial Network: The GameStop Short Squeeze and the Ragtag Group of Amateur Traders That Brought Wall Street to Its Knees

“Short-selling is nothing more than a method of investing and trading that recognizes the life-cycle paradigm arising from an economic system that thrives on creative destruction. A major component of that creative destruction is the process of cleaning out prior excesses and forcing the redeployment of capital to more productive areas of the economy.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“All of the short-selling chart pattern set-ups that we use rely on a high-volume break off of the peak, and this is often the first sign of institutional money exiting a stock en masse as they begin “distributing” stock.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“Only sell short stocks that trade a minimum of 1–2 million shares a day, and preferably more. In general, avoid thinly traded stocks as short-sale candidates, as risk can correlate inversely to a stock's trading liquidity.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“Screening for stocks with heavy-volume price breaks on a daily and weekly basis is the most effective way to catch potential short-sale targets once they start to come under distribution.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“The huge-volume price break off the peak that defined the right side of the head in the pattern almost always resulted from a late-stage base breakout failure.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“Late-stage cup-with-handle formations seem to be particularly vulnerable, especially when they are very wide and loose. A cup-with-handle formation is often a very productive first-stage base to see when a stock is just starting a big upside price run, but when you start to see these sloppy late-stage cup-with-handle formations after a long upside price move, they can often mean that trouble is brewing.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“LSFB set-ups are generally shortable as the stock drops back below the prior base breakout point and the 10-week (50-day) moving average.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“From a psychological point of view, the POD occurs when a hot-stock high-flyer breaks down severely, at which point it is able to bring in investors who missed the prior big price run and see the stock as “cheap.” This sets off a very rapid price advance back up to the highs and the left side of the POD that is quite simply unsustainable. At that point, everyone who is going to buy the stock has, and the sellers who hit the stock at the left side peak of the POD can now finish distributing their stock. With fewer “suckers” left to buy it, the stock then breaks down in rapid fashion and in most cases to new lows.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“I will look to short into low-volume moves up to the top of the bear flag's price channel once I can determine a reliable high in the pattern.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“The action of a wedging rally or a bear flag occurs after a prior price breakdown, and the two formations are really just different versions of the same phenomenon. The difference is that a wedging rally following a prior price break or downtrend occurs as a stock bounces while a bear flag occurs when there is not a significant bounce and the stock just moves sideways. In both cases, the stock is consolidating the prior downside move.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“Wedging rallies up into the 50-day moving average, or any other moving average for the matter, rarely stop exactly at the moving average itself. It is very common for a stock to rally just past a key moving average, only encountering resistance once it has rallied 2–3 percent and sometimes as much as 5 percent or more beyond the moving average. The key is to watch how the stock acts as it moves above the moving average and be on the lookout for voodoo days or a high-volume outside reversals to the downside.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“In most right-side POD failures, once the stock breaks down it will generally carry through the 20-day moving average and then find support at the 50-day or 200-day moving averages, depending on where they lie within the overall pattern, and then try to rally. In most cases this rally will carry back up into the 20-day moving average, which presents a secondary short-sale entry point. The breakdown from there is nothing short of exhilarating for any short-seller short the stock at that point!”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading

“Stocks can often begin an overall topping phase with the formation of a big, ugly pattern whose dimensions are so exaggerated as to resemble something outlandish, which we might refer to as “Clown's Foot Syndrome.” They're like the oversized shoes that clowns typically wear and which look woefully out-of-place within the context of the overall picture.”
― Gil Morales, Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading