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Rubicon Technology, Inc. Message Board

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  • mountainmansmith mountainmansmith May 1, 2011 8:02 PM Flag

    Short Squeeze

    There is an opportunity cost in remaining short even though the price is rising in the hope that one day in the future the price may fall. The money tied up in the short position cannot be used to make other potentially more profitable investments. Some shorts may cover to simply get out of their position, take their losses and move on.

    Your argument to remain short in the face of a rising stock is similar to continuing to hold a long position that has gone down significantly because one day the stock price may recover. Sometimes you need to admit you made a mistake, sell at a loss and find a better story.

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    • I believe another major factor for shorts is the psychological fear that if the shorted stock keeps going up in price, you owe more and more to your stock broker. As mentioned above, you can lose more and more on the investment.

      At some point the negative emotion of potentially losing even more money on an investment affects almost everyone, but especially smaller investors. This is one reason why many individuals sell out when the stock market hits a new low, and they end up buying back in at a higher price.

      Another unique factor with shorting is you can lose more than your original return when you sell short. Holding a stock long limits your losses to what you paid, but shorts can lose two or three or more times their original investment. This makes shorting an even more dangerous and emotional bet in the stock market.

 
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