Phil Anthropy

Short Selling Ban Welcome

I appreciate the comments, including the condemnatory ones, about this article. To clarify my AIG position for the record, I bought a small position in AIG at around 4.65 as a trade a week prior to September options expiration, because the AIG September 5 covered call that day was 1.35, a huge risk/reward ratio for only a few days holding. I figured that AIG would be similar to Bear Stearns in being "too big to fail," and recalled that Bear stock fell but then recovered. Two days after I bought AIG, the stock price had fallen to under 2 on trading of over a billion shares. I was prepared to lose the entire amount of my trade, since I was aware of that risk when I bought in. When the bailout came, AIG stock recovered. I sold out for a few cents more than my purchase price (the stock has since gone higher) and also kept the premium from the covered call after the option expired worthless for the buyer. It is correct that the short sale rule did help me, and it would have been better if I had written the article after divesting. However, now that I am out of AIG, I still hold the same views. My profits in the AIG trade were small, and I hope readers will believe me when I say that my motivation for the article was a genuine opinion..

I do not regard covered calls as related to short sales, particularly naked shorts. Covered calls are a bet that stock prices will stay the same or go up a little but not much. Buying a put option is like selling short, but I am not opposed to that, because the bid/ask spread and other factors mentioned in the article mitigate attacks on a stock's price through buying put options.

If a short seller sells massive amounts of stock into the market, the price will go down quickly. Buyers interested in the stock at the lower price come into the market to acquire the shares. The more stock that is sold or sold short, the lower the price will go. As investors watch the share price plummet, they panic and sell their holdings, adding to the downward cascade. When the price has been driven down far enough, the shorts "cover" their positions by gradually buying stock. The price will indeed rise then as the demand increases, but the shorts are betting that their average purchase price will be less than their average short sale price. At times, other hedge funds that are not short the stock come in at the bottom with massive purchases, driving the price up and forcing "short covering" purchases that accelerate the rise. The long folks then gradually sell out towards the top. The difference is that a long play doesn't destroy the value of the underlying stock by erasing billions of dollars of market cap. Short sales can and do.