Ford Motor Co. (NYSE: F) remains a potential short-trade candidate, but shorting exposes investors to theoretically unlimited losses if share prices rise sharply.
Short sellers of dividend-paying companies must reimburse dividends to the lenders of borrowed shares, increasing the cost of maintaining bearish positions.
Applied Digital (NASDAQ: APLD) currently has roughly 40% of its float sold short, creating conditions where a rapid rally could trigger a significant short squeeze.
Some investors get rich while others struggle because they never learned there are two completely different strategies to building wealth. Don’t make the same mistake, learn about both here.
The topic came up when I told Lee that I had been hearing more investors ask about shorting stocks. He said it was one of the most misunderstood ideas on Wall Street. Using Ford as an example, we walked through how shorting actually works, why the risks can be extreme, and how traders can get caught when prices rise instead of fall.
Lee explained that short selling is the process of selling stock you don’t actually own. Your broker borrows shares from another investor and sells them on your behalf. You’re betting the stock price will decline so that you can buy those shares back later at a lower price, returning them to the lender and pocketing the difference.The key risk, as Lee stressed, is that losses can be unlimited. A stock you shorted at $10 could rise to $30 or $50, leaving you exposed to potentially catastrophic losses. “When you’re long, the worst you can do is go to zero,” he said. “When you’re short, there’s no limit to how far it can go against you.”
Shorting also comes with hidden costs. If the company pays a dividend, the short seller must pay that dividend to the lender of the shares. And because the broker is borrowing stock on your behalf, there’s a “borrow cost,” which can increase for stocks that are hard to find or have heavy short interest.
For experienced investors, Lee suggested a different way to express a bearish view — selling naked puts. He explained that by selling, for example, Ford’s December or January $5 puts, you’re agreeing to buy the stock at $5 if it drops to that level. The strategy can generate premium income, but it also requires margin approval and comes with its own risks.
We also talked about the effect of heavy short interest on a stock’s behavior. Lee brought up Applied Digital, a company we’ve liked for months, where roughly 40% of the float has been sold short. If the stock rises quickly, short sellers scramble to buy shares to cover their positions, pushing prices even higher — a phenomenon known as a short squeeze.
Short selling can be profitable, but it is not for the faint of heart. It requires a disciplined strategy and a tolerance for potentially large losses. As Lee summed it up, it’s a tool for conviction trades, not casual speculation.
[00:00:04] Douglas: Lee, you hear a lot about shorting stocks, you know,
[00:00:08] Lee Jackson: Right.
[00:00:09] Douglas: don’t know quite what it is in many cases. I don’t own Ford and I’m not obviously then short Ford. But Ford is a stock that I would short almost instantaneously if I were doing that right Now. to people how would it work if I wanted to short Ford.
[00:00:28] Lee Jackson: Well, you know, it’s an interesting process and the thing that we would stress to everybody is if it goes against you, the losses could be, you know, it can skyrocket because when you’re long a stock, all it can do is go to zero. Okay? But if you’re short of stock, let’s say it. Ford’s level at $10 and it gets bought out by somebody, or you know, some incredible thing like that.
[00:00:53] Lee Jackson: It could go to 30 or 40 or 50 or 60 or continue to run. So your losses can be almost unlimited. So that’s the one caveat that we always like to remind people of. And there’s, there’s two ways to do it. You have to go to your broker, whoever that may be, and say Hi, Doug, you’re my broker. I want you to short Ford Motor Company.
[00:01:13] Lee Jackson: What your broker will do is he will go into what is called the stock borrow segment of their business, and there’s a price to short Ford and he, you know, he’ll get that price and he’ll let you know, and then you say, okay, that’s fine. I can live with that. It’s because, you know, when you’re shorting stock, you’re selling stock you don’t have. So they are literally borrowing it from somebody, which is, and it’s literally called a stock. Borrow, they borrow it from somebody and sell it on your behalf. Now, the other thing that, uh, our readers and, and our viewers need to remember is that on, especially on a stock like Ford, if you do short it, you’re responsible to pay the dividend.
[00:01:54] Lee Jackson: Because you sold it and don’t have it. So that’s one thing to remember. That’s one thing to remember. But there’s, there’s another way to do it. And, and this is the way I’ve often done this is, and again, it, it, your brokerage firm is gonna check your risk profile and see if you have the capital to do stuff like this and all that.
[00:02:12] Lee Jackson: But you can also sell, uh, you can sell puts, you can sell naked puts, let’s say I wanted to sell the puts for the Ford December or January fives, you know, so you sell ’em and, and what you’re basically saying is if it goes to five, you can put it to me. I’ll buy it at five, but I’m not gonna buy it here.
[00:02:38] Lee Jackson: That’s a roundabout way to do it, you know? But for a lot of people, that’s too complicated. And you have to have options, agreements with your broker or wherever you do business. So that’s the process to short and again, it, you can make millions, I mean, billions were made shorting the, the CMO mortgage market back in ’06, ’07 and all that in ’08, and I mean literally billions when they were shorting the CMS paper
[00:03:03] Lee Jackson: and they were long credit default swaps, but that’s the way you do it.
[00:03:07] Lee Jackson: You gonna short some foreign?
[00:03:08] Douglas: something else will start to do for viewers. We’ll start this next time around, is we’ll start to talk about companies
[00:03:16] Douglas: that have the largest short interests. So
[00:03:19] Douglas: will.
[00:03:19] Douglas: the companies, the where the percentage of shares
[00:03:23] Douglas: short as the largest compared to the amount of number of shares that are outstanding.
[00:03:27] Lee Jackson: Right, right. Well, Applied Digital, a stock that we’ve liked a lot. 40% of the float was short. That means 40% of the outstanding shares have been sold short. And that’s where you get a short squeeze because if a stock goes up fast, people are like, okay, okay, I’ve had enough pain here. Uh, I’ll buy stock. They end up buying stock to cover their short, which drives the stock even higher. So yeah, it, it, it’s dangerous business and I’ve never dabbled in it too much, just when I had a really big hunch or something.
[00:04:04] Douglas: Stocks with the short interest is massive and people can listen. You can look at that and you can look at it both ways. You could say, I’m
[00:04:13] Lee Jackson: Yeah.
[00:04:14] Douglas: the herd, but you could also say, well, if they’re wrong there’s a lot of money to be made.
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