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Misadventures Of Short Positions With Scottrade

As a fairly novice investor with some good (profitable) decisions behind me, I've spent the last few years getting "broken in" with trading. I'm self-educated in finance. Don't read this for investment advice!

When I liquidated my more traditional investments -- precious metal allocation certificates and government bonds -- I initially transferred a large fraction of the assets to my newly opened Scottrade account. I had convinced myself I had a feel for price movements in silver and palladium, so I had mostly been interested in swing trading using leveraged ETFs.

I was still interested in precious metals, but I had grown distrustful of my custodian's stewardship of my holdings, and disdainful of their doublespeak as to the mechanics of cashing out. (Those suspicions were partially corroborated, but that's another story.) So I figured that actively managing my short term investments would be a lucrative endeavor. Problem was, I didn't want to day trade, and so most of the leveraged instruments I used (especially AGQ and ZSL) punished me for playing mid-term swings. I should have gone for slower profit taking using tickers like SLV (itself only worth trading, in my opinion) but it was a lesson I had to learn the hard way.

I had also convinced myself that I could smell the BS surrounding overhyped technologies. I learned how short selling worked, and was pleased to learn that Scottrade would let me short once I set up margin. So I did that. I took a reasonably ambitious short position in NFLX, at around $250/share, knowing full well that the stock could go up much further before it 'corrected.' I was ready to ride out the losses on paper (I don't remember I had a stop set up.) But then something bad happened.

The stock proceeded to rally around $50, and I bought into the rally, extending my position further. The I got a phone call from Scottrade: "we may have to close your short position." And they did -- Scottrade forced me to cover my position at the stock's all-time high. And then I missed on a very, very profitable drop in the share price, one I probably would have rode at least until the $150 dollar mark.

This process repeated with other shorts. Actually, it's more of a rule than an exception, at least with non-bluechip stocks. I can find at least four "buyin" notices in my inbox. The only non-bluechip Scottrade seems able to lend me shares while the stock rallies is CRM. That's funny to me, considering the sources of CRM's current 'valuation.'

I've asked everyone I could why this happens to me, and the usual answer is, "it shouldn't." In the meantime, I've started trading options, as buying a put contract is (apparently) not susceptible to these shenanigans/incompetencies. But I definitely got burned shorting with Scottrade, and not because of bad decisions but because of bad management. So "caveat emptor" has its short-selling parallel, at least when your broker is Scottrade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I'm still with Scottrade, and growing increasingly disgruntled -- they won't let me sell puts!