Sunday, July 27, 2008

Shorting Is Risky - My Experience with Las Vegas Sands

Recently, I started shorting stocks, which is selling a stock and then buying it back later at, hopefully, a lower price. As I've written before, shorting should only be done by experienced traders. My most recent short, Las Vegas Sands (LVS), is a good example of the inherent risks when shorting a stock.

On June 29, 2008, I wrote that it was time to short stocks, and highlighted Las Vegas Sands as a possibility. It had just hit a 52 week low and closed at $47.10 down from a high of $147.76.

After doing more research (and missing a further $9 of decline), I shorted Las Vegas Sands on 7/7/08 at $38.10 and then closed out the position on 7/11/08 at $33.69. Besides taking a quick $441 profit, I closed out the position for two other reasons. First, Fannie and Freddie was on the verge of collapse and it was likely the government was going to take action over the weekend. Second, I was planning to be out of town the following week with no access to my trading account. Both situations made it risky to have an unmonitored short position.

As it turned out, in the following week Las Vegas Sands dropped to a low of $30.56 and closed at $38.58 on Friday, which would have been a slight loss for my short position. However, the following week, the stock rose as high as $56.67, due to a short squeeze , and closed at $43.88.

If I had not closed out my short position, a $441 gain would have turned into a $578 loss, in the span of two short weeks. At last week's high of $56.67, my loss would have been $1857, very painful for just three weeks of being short. Ouch!

At this point, I am happy that I was a bit lucky to profit from the short sale of Las Vegas Sands. Even though it appears I dodged a bullet, I still think Las Vegas Sands is a good stock to short, since the casino industry is being adversely affected by the higher oil prices. In addition, the stock was unable to sustain the rapid rise from $30.56 to $56.67, which appears to be a short rally before the stock falls again.

Therefore, despite the apparent volatility risk, I may be shorting Las Vegas Sands again in the future, especially if the current market rally weakens.

Disclosure: At the time of publication, I do not have a position (long or short) in any stock mentioned for my trading account. Our managed accounts are long Fannie Mae and Freddie Mac.

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This is not financial or investment advice. Please consult a professional advisor.

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