Short-selling strategies

Selling short involves tall risks

with Charles Schwab in San Francisco. “Interest rates on margin loans at our firm are as high as 8.75% now, although those who borrow large amounts pay less, down to 7.25%.”

Sylvas says that you’ll have to keep 50% margin in your account in most cases: if you sell short $20,000 worth of stock, for example, you’ll have to keep $10,000 worth of cash or other securities in your account. If the stock price moves up, you’ll have to put in more cash or securities as additional margin.

Given all these risks, when might it pay to short a stock? “Only when it’s grossly overvalued,” says Guy. Moreland says that the best single indicator he has found is heavy insider selling of a stock that is trading at a price well below its 52-week high. “I remember seeing that pattern at Discovery Zone, a company that offered play space for children,” he recalls. “When I questioned the CEO, he expressed surprise at how seasonal his business was. I decided this was a company that didn’t really know its market, and it proved to be a successful short sale.”

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