Friday 20 December 2013

Covered Short

Have you tried shorting stocks?

If you interested, do be aware that only amateurs will use SGX's securities borrowing and lendiing programme (SBL).

How I know?

I was that "sotong" (dumb) amateur. 

If your portfolio is big as in landed class, and you want to borrow shares to short, ask your prime broker. The rates are way much better than SGX's!

If your portfolio is more HDB like, do check out CFDs instead.

Trust but verify 

Since I learn better by doing, I've done both SBL and CFD. I encourage you to do the same so you can form your own opinions. Come to think of it, "trust but verify" is recommended for all things in life! OK, except for spirituality...

There is also this naked short and cover on the same day technique used by day traders. That's for the "professionals". Don't play play with naked shorting. If you didn't cover on the same day, SGX will "punish" you. Try it if you don't believe.

Covered Short

We often see terms and conditions and caveats way down at the bottom in fine print for promotional and advertorial articles. (Hello, this is not an advertorial OK?)

I'll put mine here before you read further:

1) You own some core equity holdings for 3 or more years.

2) You are familiar with how they react during different market sentiments.

Examples leh!

OK, look at your core holdings during May 2013. On the suggestion of "tapering", notice some of your holding drop quite a bit, some drop only slightly, and some hardly moved at all. That was your full-free rehearsal on how your core holdings react during a change in "market sentiment".

Look again for the past 2 weeks. That was our 2nd mini full-dress rehearsal. Did your core holdings react in a similar way? OK, drop wasn't as big as in May but notice the similarities when it comes to volatility of your core holdings?

Now let's say market sentiments recovered and STI went back up to 3200 or 3400.

In 2014, if you notice another shift in "market sentiment", you now know which core holdings can be a good candidates for doing a "covered short".

Short the stocks you already owned?

You only need to "borrow" stocks to short if you didn't already own them. 

No need SBL, no need CFD. No naked shorting.

Just sell (short) the shares you already owned!

Simple right?

Then buy back the same quantity of shares you have sold at a lower price (hopefully).

Warning: It can go horribly wrong. After you sell, the stock can go ballistic up up and away!

Hey! Don't look at me! Now you understand my 2 caveats above. You have to have an edge over other newbies by intimately knowing your own core holdings. If you don't understand your own core holdings, blame who?

Financial Engineering

I own a core holding bought at $1.00

I "covered short" (sell) it at $1.20

1) If I close my "covered short" by buying-in at $1.05, I would leave my original position at $1.00 as an open position. I'll book the "sell $1.20 and buy at $1.05" as completed transaction with booked profit of 15 cents.

2) If I close my "covered short" by buying-in at $0.90, I would book "sell $1.20 and bought at $1.00" (my original position) as completed transaction with booked profit of 20 cents. And record $0.90 as the "new" entry price for my core holding. 

This is optional. I just liked the idea of seeing "green" in my portfolio. Hate to see "red" losses... Also, it's motivating to be able to lower my entry prices without resorting to "averaging down".

Nothing new at all!

Some of you maybe screaming now - that's nothing new! Just old wine in new bottle!

You are absolutely right!!!

Don't be fooled by terminology or labels. Some call what I've described as Rounds 1,2,3,4. Some call it buy sell; buy sell. Some call it Trading around a core position, etc.

A rose by any other names is still a rose.

So why I call it covered short?

Men would understand. Even when we are with our wives or girlfriends, when a pretty babe walks by, what do we do?

Many times when I sold a core holding with the intention to buying it back at a later date (preferably at a lower price), I get distracted and bought another stock instead or completely forgot to buy the sold core holding back...  (What a cad I am!)

After several bouts of seller's remorse, I now treat those core holdings I temporarily sold as "covered shorts". 

When we short, we have to cover it back. Since it's a "short trade", plus my financial engineering "incentive", I am now more focused and motivated to find a good buy-in price to complete the transaction.  

Protecting profits

This technique is mainly to  protect my unrealised profit.

New readers may want to read more about protecting profits here:

The 3 Ms Part 2 - Money (episode 2 of 2)

Remember: If the reasons you bought a stock are no longer valid, then after you sell, don't buy it back!!!

This covered short technique is when you still have faith in your core holding. You are merely seeking a short separation to make the heart fonder (婚).


  1. er...

    what happen if you sell and the price keep spiking upward with not retracement? you know like the bluemont case?

    1. coconut,

      1) I am talking about core holdings; not speculative trades.

      2) Well, for the case of Bluemont, I would tear my chest hair out lor!

      But guess what? Now that Bluemont has discovered gravity,I guess I can cover back at a much lower price? Now rubbing whiskey on my chest to grow back my chest hair.

      Of the 3, if I want to cover back, it would be Asiasons.

      Having said that, I would not want these kind of stocks to be part of my core holdings. As speculative trades, they are OK ;)

    2. yes i know, why core holding cannot shoot up after you sell mah?

      whats your protection against upside thats what i want to know, and thats the most important question i got to ask (or you got to ask yourself, same thing)

    3. It's OK, I know you are dyslexic.

      I did put in italic in my post:

      "Warning: It can go horribly wrong. After you sell, the stock can go ballistic up up and away!"

      Of course it can go up after we sell.

      The protection will be to "cut-loss".

      Under financial engineering, I book the loss as "sell $1.20, buy-in 1.30"; loss booked at $0.10.

      Now I hope to stock will go up up and away! I still have my original position at $1.00 remember?

      Hedging costs money. No free lunch :)

      Thanks for the challenge!

      Shorting has potential of unlimited losses. Don't do it if you have not mastered money management!

    4. knn, you win la haha.....

      cut loss it is, thats your protection, i ask cos i didn't see it!

      its a good idea as i say, trading around a position.

      first you have a position ready to make money.

      2, if you so cut loss, you can still ride the long term trend, which is critical to profit.

      3, if you use cash to hold your positions, your cost of trading will reduce tremedously! your cut away the carrying cost (financing cost) for the long and the short, you also cut away the borrowing cost which can go as high as 10% pa.

      nice work but don't forget to cut lost, thats the most important!

    5. now go and write "cut lost" ten thousand times!

    6. coconut,

      For traders, it goes without saying - no chips; no play.

      I've added a hint in my post with my link to previous post on protecting profits. Those curious on limiting losses will check-out the part 1 of Money on limiting losses.

      For investors, there are other avenues if they don't like to cut-loss ;)

      Having a good active salary helps if you have yearly reinforcements to dilute your paper losses!


      Retirees and I can't play this technique anymore :(

  2. Medicine to stop your itchy hand and itchy heart. Do covered short.

    1. a better way is to go to the casinos and spend a few hundred or thousand once in a while.

      do covered short wait forgot to cover, "toa kee" lao!

    2. Coconut,

      And that's precisely I call it a short trade instead of sell and buy at lower price or round 1,2,3,4...

      It's to be crystal that I NEED to cover this trade no matter what - either at a profit or at a loss.

      From bitter experience....

      It's so easy to get distracted.... or fall asleep at the wheel....

    3. CW,

      I didn't include covered short in my 3M posts as its not for newbies. I did stress it's for core holdings held for 3 years or more - it's not tikum-tikum; but knowing how our core holdings really well. If not, where's our edge?

      Your rounds 1,2,3,4 complement your sitting tight on 10 baggers very well ;)

      Especially your taking "capital" back from portfolio and stuffing it inside your pillow. When you "cover back" during the next market low... That's what I call lowering your price of entry!


  3. i want to tell a story, where i first get into trading commodities futures. a group of 3 plus one "supervisor". we trade almost every night like in a casino.

    one older chap who looks very the can and a big rolex watch, tell us how he trade, short here long there, cover here and cover there, lock here and lock there, looks so impressive.

    after about a few months or a year, he stop coming and my supervisor confess to me that he was trying to be very fency by trading around a position, i think it was cotton, by what locking here and there. i have no idea what he is talking about, (a buy and a sell order in a same counter is not a hedge) may be what he did was limit (look) his profit and let his losses run.

    he told me that guy had lost nearly 400k in his trading, thats a lot of money back then! can buy you a landed property!

    so whatever strategy one wants to apply, make sure you know exactly what you are doing.

    1. oh and the other story i told already, my china friend, who first trading in property stocks in china, ends up having a core positions in one property stocks, now is at its low price after the property burst.

      he is doing the opposite of what should be done. instead of having a core position than trade around it, he is trading that stock and ended up holding all he can hold, thats suscide.

    2. coconut,

      1) A buy and sell in the same counter - if spreading it's another story. That''s the realm of professionals.

      2) I guess falling into the trap of over-trading is something I am deliberately avoiding - hence my "gai gai" on some days of the week.

      It's my way to make sure I stay away from the screen when there's no setups or to let my positions work themselves out - either stopped out or hit my limit orders.

      Hey, you have 63 trades a day, you should be talking... LOL! OK, OK, you pro mah!

      3) A short-term trade turned into long term holding... Only amateur retail traders do that. Been there; done it.

      Trade at home traders like me have one big disadvantage compared to prop traders working for institutions - risk management.

      It can be good if I had a "supervisor" to force me to reduce my position size during losing streaks. Freeze my trading account when I hit a big loss, or kick me out of the trading room until I have the presence of mind to stick with my trading discipline...

      coconut, for you to trade at home, I guess you have met your demons and knew how to "control" them.

      Trading techniques are not difficult; it's the trading psychology that's the killer!

    3. Remembered watching one video on trading as professional traders. The supervisor always said to the trainees: "It is your trade, you decide. I can't decide for you!."

    4. CW,

      And so it shall.

      Can you imagine a professional trader waiting for a tweet, sms, or email alert from a subscription service to decide their trades?

  4. Hi SMOL
    "Some call what I've described as Rounds 1,2,3,4. Some call it buy sell; buy sell. Some call it Trading around a core position, etc."

    So by now you should have your favourite core holdings?
    May i ask whether you trade around your core position in all "types" of market or only in certain types of market?
    And which types you prefer?

    Do you consider it as core trading if the time factor is 3 to 5 or even 7 years?
    Yes it's very difficult for "Chiak Ka Kee" to do the above.
    Wink. Wink.
    That's why rental income and CPF's Life will help for daily minimum survival when push comes to shove .

    Anyway it's time to modify some of my investment strategy or style .

    1. temperament,

      1) I've found trading around a core position works best when the stock has an obvious "saw-tooth" pattern in the charts and the difference between the 52 week high and 52 week low is not tiny.

      Less than 10% potential drop in price I don't bother. Remember, I use Trading around a Core position to lock-in or protect profits - these are not speculative swing trades.

      2) This technique is "stock specific". As in my post, some stocks hardly move even in a down market; some move a lot! Those got study finance ones will call it low beta or high beta. Show off!

      It's more bottom-up than macro top-down. Eg, STI in 2013 is relatively flat; but those who owned penny stocks (Myanmar, Iskandar, resource plays anyone?) as core holdings have a totally different opinion and experience!

      3) I prefer stocks I owned go up in price ;) Market is only relevant when I own the STI ETF (I don't) or when I am hedging with the Simsci (I do).

      I am developing my skill sets to be able to survive in all markets - hence my self appointment as a nano hedge fund manager. (Words are powerful in affecting mindsets)

      I can understand what you are going through. I too had enough of being a one-trick pony - only make money in bull market retail investor :(

      4) Yes, it's quite "gung-ho" to have the majority of our net-worth in stocks when we don't have the buffer of a regular job. We need to spread the love around - our context and perspective different from those on their journeys to reach goals ;)

      Have fun on your make-over! But make sure your wife and son still recoognise you!

  5. Most penny stocks are speculative. But blue chips to semi-blue chips can not escape market cycles. i found trading in them in a Bear market is not worth it at all. Trading in them now maybe better but.....
    Who knows when the BLACK SWAN suddenly appears?

    As for hedging, there is no free lunch.

    1. tempeament,

      1) That's because you have a long bias ;)

      coconut would be shorting penny stocks like nobody business in a bear market. LOL!

      And I hope I am wise enough to add to my Simsci hedges during a correction ;)

      2) I hope young readers can take note of your style of questioning. Respect!

      You do tons of research first, then go round asking for 2nd opinions.

      Compare this to lazy empty vessels waiting to be spoon-fed ;)

  6. PAISEH!
    My apology but we need to keep on feeding our mind about "investing". i ask questions for the same purpose. No offence.

    In conclusion, i like to quote:-
    Bears & Bulls make money, Pigs get slaughtered not because they are not smart but blinded by GREED!

    1. Non-taken. It's a compliment.

      I enjoy 2 way conversations. It's more intellectually stimulating!

      I think we better stop. Wait people laugh at us - one ITE and one O'level pretending to be intellectuals!?


  7. HA! HA!
    WB said no need high IQ one but it definitely helps.

    1. Sir Isaac Newton proved that his high IQ won't help.

    2. Ha! Ha!
      Of course, we can always P & C what's suitable for us or our Point of View.
      Alas, for Isaac, he found out too late the market was/is so vast difference to the milky way galaxy.


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