Playing the short selling game
"Follow me if you want to live."
– Arnold Schwarzenegger, Terminator
The mechanics of short selling are deceptively simple. For example, you sell a stock at 100, buy it back at 90, and pocket the 10. It works in absolute or relative to a benchmark. There is only one additional step that needs to take place before the short sale. Short sellers deliver shares they do not own. So, they borrow those shares from a stock lending desk with their brokerage house first. Once they buy the shares back and close the trade, they return those shares.
Do not let that simplicity fool you. Due to the infinite, complex, random nature of the game that we have considered in this chapter, 90% of market participants fail. Of the remaining 10%, fewer than half will ever engage in short selling. That is the unapologetic reality of the markets.
Our objective is to navigate these challenges and succeed on both sides of the portfolio...
