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 (小别胜新婚).