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I attempted to short TWTR today before the earnings, as a big gap down was absolutely predictable. I couldn't: my broker didn't have any shares. It's a security that is very difficult to borrow, due to extremely high short interest --in fact it has been the case pretty much since the IPO.

There might exist mechanisms, whether you can actually use them is another question.



I hesitate to mention this, since I don't want to recommend trading it, but for academic interest: you can create "synthetic" short positions using options.

The mechanics: Say hypothetically Twitter is trading at around $65. You post $1300 of collateral with your broker (cash or stock). You then sell 1 contract (100 shares worth) of Twitter calls with a $65 strike for the prevailing price (about $3.80 when I did it, or $380 for the contract) then use the proceeds of that to buy 1 contract worth of puts with the same $65 strike. When you factor in the spread, skew (slight difference in put/call pricing despite that they're "supposed" to be symmetric), and commissions, it likely costs about $100 to $200 total to enter this trade. Then you wait until earnings.

You would have, in the instant case, made out like a bandit. When the market opens tomorrow morning, your puts will likely be worth approximately $15, your short calls about -$1. You'd presumably choose to exit the trade rather than taking risk to ride it to expiration, so you'd sell the puts, buy calls to cover your short, and (after again paying the spread/commission) be up $1,300 for your trouble.

You can work out the math to prove this position is roughly -100 delta in Twitter: if the price of Twitter declines by $1, the position gains $100 in value, if it increases by $1, the position loses $100 in value. Neither side is capped. (Well, OK, the gain has a theoretical maximum if Twitter goes to zero before expiration but that's highly unlikely.) This is equivalent to shorting 100 shares.

Why isn't that totally free money? Well, if Twitter were currently $80, you'd be looking at paying +/- $1,500 to exit the trade. You also might find that happens at the worst possible time, due to a potential margin call on your short position. The market is a humility generation engine for people who think they're consistently smarter than it.


I never liked these fully levered positions. I prefer to just plunk down the $380 for the puts, maintaining the upside exposure, and cap the downside to $380.


"Leverage is the only way a smart guy can go broke." - Warren Buffett


This is why derivatives exist. Futures and options are easy to trade and can easily get you into a position of being short/long whatever you want.


When a stock becomes hard-to-borrow, the options will become more expensive. The theta will be equal to the accumulated interest charge until expiration.

Options can give you access to short-sales if your broker cannot locate shares to borrow. But in that case, what you need is not options, but a broker who participates in the securities loan market. Options will not provide a "free lunch" over simply borrowing the shares.

Of course, options do have the benefit of a truncated payoff. That's one thing you don't get with simple shorting.




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