A reader wrote in recently with a great question on shorting, and I thought it might be valuable to share the discussion with the rest of you.
The question: "What does it mean when there are no shares available to short? Does that mean that people have them all, and they expect a decline in the stock?"
Let's use Citigroup as an example to address this point. C is hard to borrow, virtually impossible to borrow, despite the fact that there are 5.4 billion shares outstanding.
Why? Because there is an arbitrage between the common shares and the preferred shares, whereby EVERYONE wants to be long the preferred shares and, as a hedge, sells the regular shares. People who bought the regular shares have asked their brokers not to lend the shares, thus restricting the shorting of same.
In addition, when the short squeeze hits and the hard-to-borrow shares become nearly impossible to borrow, the "synthetic short" position--long put, short call at the same strike--is trading at an $0.80 premium to where it should be. The firms that have available shares to lend are thus asking $0.70 to $0.80 for the borrow.
So the lack of availability to borrow doesn't mean Citi or any other stock is about drop because their shares are hard to borrow. It's just about the money, not the market direction.
The immediate and long term future for PENN looks really good. Question is why do you want to short? Because it's run up so fast? Because the FED will likely stop pumping the economy? Those might be good reasons, but then you might as well short Netflix or Priceline or one of the other momentum stocks that are in the stratosphere. On fundamentals, PENN looks good short and longer term. That's not to say it won't correct along the way. If you are talented enough to time your moves correctly, more power to you.