Most people understand that shorting something means you'll make money if it goes down. Here's how it actually works:
It's Saturday afternoon and you stop by your ex girlfriend's apartment to pick some of your old stuff. You guys are friends and all, so you just let yourself in. You're grabbing your clothes from behind the fridge and see that she's got a case of Budweiser sitting in the pantry next to it. You happen to be on your way to a pool party and you know that your frat boy friends will be out of beer by the time you make your "casually late" entrance.
So you "borrow" that case of beer from your ex. That's called the locate, and since you didn't get her permission then that'd be called doing it naked. (Hey, stay focused here and stop dreaming about your ex's great body. I'm learnin' y'all something right now.)
You get to the party and sure enough, your boyz are desperate for more beer, so you sell (read: short-sell, since it ain't your beer in the first place) them the case at a dollar a pop, and you just pocketed $24.
Sure enough, you ex calls you just then as she's got a new loser boyfriend who wants to drink some Bud and she wants to know why you've stolen her beer (naked shortsellers ALWAYS get in trouble).
The brilliant part of this particular trade is that you stop by the Safeway on your way to your ex's and pick up a case of bud for $15. And you've just "covered" your short sell at a nice $9 profit (you sold the beer at $24 and bought it back at $15, see?).
Hmm, trading beer...maybe there are some real arbitrage opportunities here that I've not realized before.
Not exactly true: This isn't a naked short as he "located" the beer.
Had he promised to bring beer to his boys, then "borrowed" it from his ex, then covered his short sell it would be a true naked short.
August 14, 2008 at 4:48 pm
Timothy Sykes
thank u for making my job a bit easier, hope you're doing well!
August 13, 2008 at 5:33 pm
anon
Funny how idiotic the media is. They STILL don't get it and give out incorrect information to an uneducated public.
Technically this is not naked short selling because he actually has the beer (eg he already located and borrowed the shares). It would be naked short selling if he went to the party, sold beer he didn't have, then went to the store to try to find the beer that was sold over the next three days.
August 13, 2008 at 3:53 pm
scasi
Cody, that was not a good explanation. Terrible, in fact.
August 13, 2008 at 1:39 pm
Wes
Classic!
August 12, 2008 at 11:12 pm
Joe
@ Cody and Bob: sometimes you do nothing and wait for a lawsuit from your ex, and settle for an amount a lot closer to $15 than $50. see also, ARS buybacks
August 12, 2008 at 9:43 pm
Joe
@ Cody and Bob: or, you could refuse to reimburse your ex and if/when she brings suit against you, you appeal to the judge for a judgment of only $15 since that's how much she paid for it originally
August 12, 2008 at 8:05 pm
Cody Willard
Bob, you got it! The biggest problem with shortselling anything is that your loss potential is unlimited. Whereas you can only use what you invest when you buy something long.
August 12, 2008 at 11:12 am
Bob
OK I understand now, but I have a question. While you are busy selling the case for $24, let's say there's a news report that a worldwide blight has wiped out the barley crop and bud jumps to $50 a case. Do you lose $26?
August 11, 2008 at 9:53 pm
Justin
12,000 here we come. Can't wait to short the next leg down.
August 11, 2008 at 4:40 pm
Erik
Best explanation I've ever read on this! Now I get it.
August 11, 2008 at 2:30 pm
aboutthis blog
Cody Willard is an anchor on the FOX Business Network. Willard is also the principal of an investment management company.
He was a long-time featured columnist for the Financial Times and TheStreet.com as well as a regular featured economist and stock picker on CNBC's ''Kudlow & Company."
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Pavliga
great, usefull 0_0
Jaxson Black
Not exactly true: This isn't a naked short as he "located" the beer. Had he promised to bring beer to his boys, then "borrowed" it from his ex, then covered his short sell it would be a true naked short.
Timothy Sykes
thank u for making my job a bit easier, hope you're doing well!
anon
Funny how idiotic the media is. They STILL don't get it and give out incorrect information to an uneducated public. Technically this is not naked short selling because he actually has the beer (eg he already located and borrowed the shares). It would be naked short selling if he went to the party, sold beer he didn't have, then went to the store to try to find the beer that was sold over the next three days.
scasi
Cody, that was not a good explanation. Terrible, in fact.
Wes
Classic!
Joe
@ Cody and Bob: sometimes you do nothing and wait for a lawsuit from your ex, and settle for an amount a lot closer to $15 than $50. see also, ARS buybacks
Joe
@ Cody and Bob: or, you could refuse to reimburse your ex and if/when she brings suit against you, you appeal to the judge for a judgment of only $15 since that's how much she paid for it originally
Cody Willard
Bob, you got it! The biggest problem with shortselling anything is that your loss potential is unlimited. Whereas you can only use what you invest when you buy something long.
Bob
OK I understand now, but I have a question. While you are busy selling the case for $24, let's say there's a news report that a worldwide blight has wiped out the barley crop and bud jumps to $50 a case. Do you lose $26?
Justin
12,000 here we come. Can't wait to short the next leg down.
Erik
Best explanation I've ever read on this! Now I get it.