Probably as a result of the recent pullback, I’ve found myself wondering about trying to profit from shorting or buying puts. This is not an area in which I have a lot of experience.
Does anyone have any resources/books/academic articles they’d be willing to share? Personal anecdotes are welcome as well.
I’m not so much interested in running an ongoing short portfolio. Instead, my thinking would be to assemble a list of high-conviction names, then use P123’s tools to identify the weakest of the group for real money.
I don’t have much experience in shorting stocks, though I’ve talked with a lot of people who do. I’ve long been wanting to find or create a shorting algorithm that might improve or smooth my returns. But I haven’t been able to come up with one. The risk/reward for shorting is terrible, since you can easily lose more than 100% of your investment and your maximum gain is limited to 100%. Buying puts has a much better risk/reward ratio since you can only lose 100% and your gains are unlimited. But puts are extraordinarily expensive since volatility almost always increases as stock prices decrease. I’ve been trying to buy puts on horrible stocks recently but haven’t found a single moderately priced one. I’m not saying it’s impossible. Perhaps one can only buy puts during periods of low volatility, which is logically the best time to buy them anyway. Anyway, I also had a hard time finding literature on these subjects, and talking to others who invest in shorts and put options was the only way I was able to create strategies for these.
Thanks Yuval, your observations are consistent with my own feelings on the matter. I’ve ordered a few books which might shed some light on the accounting angle (Mulford’s Financial Numbers Game and Creative Cash Flow Reporting, and Schilit’s Financial Shenanigans), but like you, I’ve never found much helpful literature on the subject, so I’m not optimistic.
I do not short stocks either, as I too have been unable to find a good system to go about it practically. That said, fellow P123 user Kurtis Hemmerling wrote a great piece on SA about shorting stocks, and how timing can play a factor as well (hint: VIX).
You can make a screen / simulation that makes money shorting, but it’s hard and wouldn’t recommend it for most people. Stocks that are losing money (FCFTTM < 0) tend to be good companies to short. Poor long term (52 week) momentum is also helpful. Super high BeneishMScore is a useful factor Companies that print shares like crazy are wonderful shorts. Add that all up and you’re getting close to a breakeven short screen…
Generally, Price needs to be >5 or >10 to be able to short with leverage against a long acct.
Companies that print shares like crazy are wonderful shorts. Add that all up and you’re getting close to a breakeven short screen…