In many ways it’s easier to identify egregiously overvalued stocks than it is to find undervalued ones. Of course in the short-term short-selling can be very painful, both financially and psychologically (see TSLA or GME, or any number of “obvious” shorts in the current market). But over time a good short portfolio should underperform the market, letting you leverage up on the long side to stay net 100% long, but with higher returns and lower variance. This is the core of Chanos’ strategy, and he’s crushed the S&P for more than 30 years, so it clearly works if done well.

So that’s the basic motivation for this thread. We can discuss theory and mechanics of short-selling, and discuss specific names. Who’s with me?

One question I’ve been pondering: Chanos mentions running his portfolio at 190/90, but shouldn’t that be beta-weighted? I’ve never see him mention it, but a lot of the wild story/bubble stocks trade at well over 2 beta, so that you could really mess up your net long exposure % if you don’t take beta into account.

Not 100% sure, but shorts may be the opposite beta of the underlying, so a stock with beta 1.28 would have a short beta of -1.28

But this begs questions of market efficiency, a rigorous and realistic definition of beta, and the efficacy of the SML

I would never short anything. The long term trend of the market is upward and your gains are capped at +100% and your losses could potentially be -1000%+. I prefer to take the other side and sell puts on value stocks. I will leave pure shorting to the high IQ's and people who think they are high IQ.

I feel the same way. Shorting seems like a suckers bet. The market generally goes up or at least sideways. Plus right now we are flooded with liquidity which doesn't make shorting all that attractive either. You have to be absolutely perfect in your timing and discipline to really score shorting stocks. The cool kids who think they are smarter than everyone loves to short though.

But right now it seems there is even a bigger group of even cooler kids targeting shorts. And it really is genius. Right now all sorts of really crap companies are exploding exponentially by these hedge fund shorts being targeting very effectively causing epic short squeezes. It will end up with much pain on both sides and who ends up holding the bag is yet unknown. But whomever does get slaughtered will scream "RIGGED"! Yet no one is forcing any of them to play

I believe Thorp did a lot of this back in the day.

Anytime you can logically hedge your positions your EG is going way up.

Tale Of Woe - Followed By A Question

Back in the 1990's I "dabbled" a bit in the stock market. I discovered that I have an incredible talent for picking losers. Short sellers could have gotten rich shorting the stocks I bought. It seemed my fate was that as soon as I bought shares in a company, that company's stock immediately tanked. On the other hand, stocks that I passed on immediately took off like a rocket. (My worst "pass" decision was on a Utah based company called Iomega that made computer storage products. Around June of 1995 I listened to an Iomega salesman giving a spiel about a "new product" - code named "Orange Juice" - that their [new] CEO would announce in August. He described a storage device - and an accompanying storage media - that would pack 20 Mega-Bytes of data on a single floppy disk. If true, this represented quite an accomplishment as the standard floppy disk - at the time - stored a miniscule 1.44 MB on a 3.5-inch form factor. It occurred to me that a disk drive which could pack 20 Mega-Bytes of data on a single floppy disk might sell like hot cakes, so I approached this salesman after he had given his spiel. The "conversation" went something like this ...

Me: "Is Iomega a publicly owned company?"
Salesman: "Yes."
Me: "Where are you traded? What's your ticker symbol?"
Salesman: "IOMG. We're traded on the NASDAQ."

There was a pause and then the salesman whispered: "We didn't have a very good year in 1994." I nodded and gave him a copy of my business card. The next day at work I picked up the phone and asked my broker (Charles Schwab) for a quote on Iomega. "Iomega. Bid $2.25, Ask $2.50." I asked if he could send me a research report on Iomega? "Sure," he replied. When the report arrived, I started reading.

The salesman's comment that 1994 had not been a "good year" for Iomega was a bit of an understatement. The company had lost $40 million dollars in a failed attempt to develop a "floptical" drive that could store 10 Mega-Bytes of data on a single floppy disk. Two of the company's board members had resigned and the CEO had been fired. A new CEO, Mr. Kim Edwards, had been lured away from General Electric to try and repair the damage and save the company.

After reading the report and giving the matter careful consideration, I concluded that "Orange Juice" was (obviously!) vaporware. How could little Iomega succeed at developing a storage device that could pack 20 Mega-Bytes of data on a 3.5 inch floppy disk when they had spectacularly failed at developing a floptical drive that [apparently] couldn't store 10 Mega-Bytes of data? Why would anybody want to pay $2.50 a share for a company that had lost $40,000,000 the previous year? Certainly not me! I was too smart to fall for that baloney. So I passed on Iomega.

Three months later (September) I'm sitting at my desk eating a sandwich while reading my copy of PC Magazine. I'll never forget this for as long as I live. The article on page 49 asked the question: "Is Iomega's 'Zip Drive' Your Next Floppy Disk Drive?" I start reading the article and nearly choke on my sandwich. "My God, this is exactly what the salesman described!" I immediately picked up the phone and called my broker. "Could you give me a quote on Iomega?" Broker: "Yes, Iomega ... Bid $20.50, Ask $21.00." I hung up the phone and started crying. Before I read the research report, I had considered buying 2,000 shares. Now, I figured I was probably too late - I had missed the boat - so I passed again.

It only got worse from there ... The Zip Drive did (indeed) sell like hot cakes. In fact, Iomega shareholders were treated to the delight of seeing their shares split multiple times. As if to pour salt in the wound, Fortune magazine sent a reporter out to Utah to cover Iomega's annual meeting at which it was rumored that Mr. Edwards would announce yet another stock split the following morning. That Friday night a large group of Iomega shareholders were gathered in the ballroom of the hotel patting each other on the back and gushing about how much they loved Mr. Edwards. One lady shareholder couldn't control herself. After a few drinks she joyously proclaimed: "Owning Iomega stock is better than sex!" which the Fortune reporter dutifully noted. After three or four stock splits, the split-adjusted price of Iomega topped out at $197.00 per share. It wasn't lost on me that I could have had those shares for $2.50/share if I had just had the courage to pull the trigger. (Let's see, 2,000 shares times $197.00/share equals $394,000.00 ...) After reading that Fortune article, I muttered to myself: "To hell with playing the stock market! I'm done."

After that tale of woe, I'll now ask my question. It's about shorting. I understand the "theory" of how shorting works. You borrow the shares of a stock that you believe is headed down and immediately sell those [borrowed] shares in the open market. If you are right and the share price does fall, you buy the shares back - at the lower price - and return the borrowed shares to whoever you borrowed them from. The difference between the price you borrowed (and sold) the shares versus the price at which you buy back (and return) the borrowed shares is your profit.

What I don't understand is the mechanics of when you must "cover" (i.e. buy back and return) the borrowed shares. With options there is a specific date at which time your contract expires. What is the "expiration date" on a short? (Is there an expiration date on a short?) When you short a stock is there a stated time span that you're allowed to "sit" on your position while you wait for the stock to fall? Can the share owner that you borrowed from demand their shares back at any time forcing you to cover - even if "covering" means you must buy and return the shares at a much higher price than what you sold them for?

I don't understand why these (supposedly astute) hedge fund managers who shorted GameStop, AMC, BBBY, et cetera can't simply refuse to cover while they [patiently] wait for the inevitable collapse of these companies - and their share prices. This is embarrassing, but I'm [clearly] confused as to the mechanics of how shorting a stock works.

The cost to borrow is currently 33.89%. Pretty easy to go broke when you shorted it at $20 and now you have to pay $100/yr to borrow a share.

That's like arguing you should never bet a big favorite in MMA, because you have to risk so much to win so little. If the odds are in your favor, it's a good bet. You can also use options to limit your losses and/or increase your gains. And yes, markets tend to go up over time--that's why I mentioned staying net long overall. So you're essentially making a long/short trade, betting that your shorts will underperform the broader market.

Of course, your concerns are valid for the vast majority of investors. This is a risky strategy that can really blow up in your face if you're not super careful about managing risk--imagine being naked short GME blowing up 50x against you. But that (sensible) aversion to going short is part of what creates the opportunity for alpha here IMO, IF you're smart and careful about managing the risk. Or maybe I'm just a cool kid thinking I'm smarter than everyone.

Yes, you can be forced to cover if the lender of the shares calls them back. There's no expiration date on a short, but margin calls / risk management limits can also force you to cover or at least trim your position. And as eastern motors mentioned, it can be expensive to stay short a hard-to-borrow stock.

In terms of position sizing and managing risk on shorts, I'm thinking Value at Risk (VaR) might be the best metric, since it combines position size and volatility? I've seen firms talk about strict size limits (Chanos has a 5% max position), but a 5% short position in AMC (IV ~174%) is much riskier than something like MAT (IV ~46%).

And does anyone know how IB calculates Value at Risk? They say here that they use two methods--Variance-Covariance, and Historical--but I can't find any details, and I'm seeing some really wonky numbers. For example, they're projecting a worst-case one day drop of 57% for WYNN and 45% for MAT (two Chanos shorts that I like, FWIW), which seem unreasonably high compared to their historical and implied volatilites. Whereas AMC they only have at 21%, which seems way too low.

"That's like arguing you should never bet a big favorite in MMA, because you have to risk so much to win so little."


I once bet Ronda Rousey moneyline to win (-1400) vs Bethe Correia, so I obviously don't feel it's quite the same thing.

If you do it right you can hold -EV (opposite market) positions that increase growth of your portfolio. So I would not use the -EV metric alone.

Small correction. The iomega zip drive held 100MB (later up to 750MB)..I had stacks and stacks of these. Marvellous product.

That's an excellent question. I would imagine Jim keeps the sector bets in-line so long tech vol hedges short tech vol, but when a wild story stock goes crazy like this that doesn't really fix the problem. He for sure is watching the beta exposure and other factor exposure even if it doesn't directly influence his calls.

Solutions: much tighter stops and de-risking, buying far OTM calls on the shorts prior to the vol going crazy. Really, owning calls is the only thing that can for sure protect you in a volatile short, which is what I did during Bubble 1.0.

I had Chanos' pitchbook for his Fund somewhere, but then we moved offices and I don't know where it is or I'd send it to you.

Also, most funds will limit solo shorts to half the size of solo longs, 2.5 vs 5% etc. So that also helps with the beta issue you raised.

Cool, yeah I'm planning to read up on Thorp's strategies. Beat the Market is available for free here. Any other good books by gamblers turned traders that you know of? It makes sense that they would have a good understanding of the value of hedging for EG.



Good call, it seems like using sector ETFs instead of just ITOT should alleviate most of the beta-weighting issues, and isolate the bet as much as possible to the idiosyncratic risk of a given stock. Chanos does that for sure; 13-Fs show they hold SPY, XLK, XLV, etc.

Do you know of a tool available that would identify the most highly correlated ETFs for a given stock, or a basket of stocks?

Fairly certain bloomberg can help you build a basket of longs to offset shorts to do that. I think you can get an online BBG subscription for free for a month, but I'm not sure if that would have all the tools. When I've used online bbg at home I only read the news articles tbh.

can't you dl the prices from Yahoo or something and run a regression if you just want an ETF to hedge your stocks?

Yeah, I'm sure I could run a one-off regression, but ideally I'm looking for a tool I can run once a week or something, as my short basket and correlations change, etc. This looks pretty good, but it only does indvidual stock/ETF correlations. Maybe I can rig something up myself in Excel.

Not that I'm telling you something you don't already know, but, man...shorting is just so hard over time. The worst is when you're short some POS dog and then it gets acquired and overpaid for by some empire builder. Or, worse, it's a fraud and they keep going up for years and you have to cover. Frauds are actually the most dangerous to short because they literally make the numbers up.

Keep your finger on the trigger when they start moving against you, probably the best advice I can give.

an interesting way to get short $GME for experienced traders only:
1) you don't want to short the stock, obviously,
2) Buying puts is hella expensive, so

What you do is sell a call spread, yes, simple, hey why are you telling me this, but wait there's more!

Let's say Feb 19 you sell the $350 otm call and buy the $450. You get paid ~20, your risk is $100, your net risk is 80. You have to have the collateral to do this trade as you are net short.

You're short expensive vol which is nice, long the time decay, and long gamma which is also nice and short delta. Fully collateralized trade, so you don't need to worry about margin requirements.

Stock is flat to down at expiry, keep the 20.

But $gme is explosively volatile mainly in the upwards direction, you say. I don't like this bet!

One trick you can do is, as long as you can keep your collateral there for a while i.e. you don't need it, you can simply roll the strikes up and out [longer tenor] if the trade moves against you.

so, say stock runs from 325 to 400 - a clear loss. You close this trade and re-short a new call spread for the next month or 2 at a higher spread, let's call it 450 to 575.

[Obviously you can pay yourself more, the same, or less but let's assume you tweak the option paramaters to make this a cashless transaction on the roll]

As long as you have you collateral in the account, you can do this again and again but you will have to write longer options. Eventually, you win the ~$20/share.

And $gme is not going to go straight up every week, you can take profits any time it dips and settle for less than the $20 gain. If vol drops, that's in your favor as you are buying back cheaper [if you wanted to]. Even if $gme is flat to down for a week or two before zooming higher, you can collect partial winnings. Or, if you're losing, just get out flat instead of keeping the original $20.

Risk - as long as you are happy to have your collateral sit in your acc't while these options roll forward, there's no margin risk, no forced short-covering risk, no margin calls.

I guess they could stop offering any call options on GME but that's an unrealistic risk. Market-makers are salivating to offer these.

Sooner or later, $gme goes back to $100-200 and you win the premium. Probably sooner than later. You just have to be willing to keep a synthetic short open for months if the trade goes against you, and keep rolling the trade forward and up. If you can't stand the psychic pain of doing this, definitely don't try it.


You can also do this if you want to get long $gme at lower levels, just write a put spread [same risks as above] and roll down, then if you want to exercise hundreds of points lower and get long for a new short squeeze, you can.

Definitely not recommending this trade to anons on the interwebz, but for people who know what they're doing and might want to get involved in the name, it bears some thought.

Isn't there a way you can exit a position on a short sell without losses going beyond 100% by just buying back when the stock doubles? If so, what would be the best way to do this in an automated kind of way?

I'm looking at Tesla stock and it seems overvalued to me. PE ratio is 1663.12 as of typing this. Seems like a lot of over optimism imo. I want to consider shorting this company, but I don't want to burn myself too badly in the process incase something goes wrong.

Many have tried and burned through billions of dollars and given up.

Good luck.

Yes, obvs you can limit your exposure by buying back if the stock trading at 100% up with a 100% loss, or you can just buy a call up there as well. That's probably the safest.

The risk with a limit order is that it gaps through and you don't get exactly the execution you want.

Bad traders have lost Billions shorting Tesla. Good traders made money and then closed their shorts. That's the difference. I mean it got cut by more than half last spring.

I like the idea of buying the call option. How is a limit order possible? Wouldn't the buy limit order get executed right away because it always purchases if the price is lower?

Also is a margin trading account free? I don't plan on making a lot of trades, but I'd like to have money in situations that are time sensitive in the future. Was thinking of getting an Ameritrade account, but if their is a monthly fee for having a margin account then I don't want to do it.

It might be better to turn my ROTH into margin since I won't pay taxes, not sure if that is possible though.

Tesla is a no-brainer short, but it's probably not even the craziest stock in the EV sector anymore. Look at NKLA, WKHS, FUV, SOLO, etc. IDEX is probably my favorite of the bunch--an old Chinese reverse merger, constantly chasing the latest fad from streaming video to cryptocurrency and now EVs. Hindenburg put up a thread with credible accusations of them photo-shopping their facilities, etc.

You're right to be very careful about not getting burned. You can do a stop-loss or a conditional limit order, which only executes once it reaches a certain price. But the easiest way to limit your downside is to just buy a put option. Plus you can buy puts in a Roth account, whereas you can't short or sell naked calls.

And keep it very small. Even if you have 100% conviction that the stock is an eventual 0, it can be a crazy ride in the short-term. Hempton's biggest loss was in Wirecard, despite being totally right that it was a fraud. I've seen a lot of people a lot smarter than me argue that frauds and promotes should only be 25 or 50bps positions. Pigs get fat, hogs get slaughtered.

There's no charge for the margin account itself, but TD's margin interest rates are borderline usury. You should really be at Interactive Brokers if you're using margin.

A GENTLEMAN'S PRIMER ON SHORTING INSOLVENT SHITCOS